As the earnings season continues to unfold, homebuilders seem to be the clear winners. Today, DR Horton (DHI) reported a blow-out Q1 in any way one wants to slice the report. Yesterday, Meritage Homes (MTH) and PulteGroup (PHM) reported similar results. That's why homebuilders have been on everyone's shopping list lately, and for a good reason: They have been outperforming the S&P500 by a wide margin. The trouble, however, is that the last time the sector was on everyone's radar was 2007. We all know what happened to the sector shortly after. Does it mean that investors should stay away from the sector?
It depends on the profile of different investors. Conservative investors may want to take some profits here, especially if they did get in early. Aggressive investors may want to stay with the sector, as the fundamentals of the industry continue to improve. Home prices, for instance, rose by 17.9 percent in March, as inventories of unsold homes are at record lows. Mortgage rates continue to stay below 4 percent, while the unemployment rate is below 8 percent. Most notably, short interest is still high for the sector, especially for Hovnanian (HOV) - 29.90 percent of the float -- and Standard Pacific (SPF) - 28.60 percent of the float, indicating that there still are doubters who may end up pushing these stocks higher, should the fundamentals continue to improve.
Qtrly Revenue Growth (yoy)
Earnings Growth (yoy)
MDC Holdings (MDC)
A word of caution: Homebuilders and materials suppliers are highly economically sensitive sectors. This means that an economic slowdown could hurt the sector, especially if it results in a slowdown in employment growth or a spike in mortgage rates - the most important drivers of home demand.