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Annotated article summary from this weekend's Barron's. Receive all our Barron's summaries by signing up here:

The Trader: Homebuilders by Kopin Tan

Summary: Last week, Toll Brothers (NYSE:TOL) announced a 33% drop in orders and more land writedown trouble, while HSBC Holdings (HBC) and New Century Financial (NEW) announced high subprime loan defaults. Despite higher bond yields and no imminent interest rate cut, homebuilders have been rallying. Cancellations have slowed slightly, but are still 34% higher than 2005, and inventory overhang is large. Good weather may have contributed to December and January's slight pickup, but a cold spell has likely ended that. Aggressive incentives and discounts along with land writedowns are expected to take a big bite out of homebuilders 2007 bottom line, impacting recent stock price gains. Homebuilders' 20 P/E average is also well above the broad market average of 15. So as capital flows in to the SPDR homebuilders ETF (NYSEARCA:XHB), Tom McManus of Banc of America councils caution. Michael Benhamou of Louis Capital Markets projects a pullback risk of about 25%. Homebuilders might have touched bottom, and savvy investors may be getting in early, but only [a long] time will tell.

SPDR Homebuilders chart

Related Links: Sector Momentum in Metals and UtilitiesHomebuilder Sentiment and the Stock MarketMarket In Fine Technical Shape, Though Housing Remains a ConcernS&P Case-Shiller Index Reveals Continued Erosion of Home Price Gains

Source: Has the Homebuilder Rally Run Its Course? - Barron's