Investors Just Got Another Chance To Buy Homebuilders

by: Todd Campbell

In the first quarter, the homebuilders ETF (XHB) nearly doubled the return of the S&P 500 as investors grew increasingly optimistic recent trends toward fewer days on the market and less new home inventory would continue through 2012.

Early in the second quarter, the performance story has been the polar opposite, with the XHB dropping 6.6% - nearly twice the fall in the S&P 500 - since the end of March. It's unlikely any but the most optimistic investor expected the torrid pace to continue in a straight line higher.

Stocks just don't rise that way. Instead, they often back-and-fill gains, shaking out weak hands and providing investors with opportunities to build positions.

The drop early this quarter is giving just this kind of chance. Three stocks, Pulte Homes (PHM), K B Homes (KBH) and Ryland (RYL) have each fallen more than 10%. And, each is starting to flash buy signals as stochastics get as oversold as they've been since last winter.

SYMBOL Q1 Return Q2 Return
DHI 20.59% -7.38%
LEN 38.60% -9.86%
NVR 5.88% -0.36%
PHM 40.25% -13.11%
RYL 22.57% -10.32%
KBH 33.23% -11.01%
XHB 25.07% -6.60%
SPY 12.69% -3.49%

While some will argue valuations are out of whack, others will recognize cyclicals have to be bought when P/E ratios are high, not low -- at least if you want to buy them at the lows when the industry turns.

Data out of Wells Fargo today suggests that turn is indeed upon us. The survey, which launched back in 2001, found sales rates exceeded participants expectations by the widest on record, marking a second consecutive month of record performance versus participants outlook.

Investors should expect fits and starts through 2012 as data is likely to be sloppy. But for those investors willing to look at the longer trend change, homebuilders offer significant opportunity for upside over the coming years.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in DHI, PHM, KBH over the next 72 hours.