The homebuilders have been one of the best plays of the year. Since January, the top four homebuilders are all up double-digit percentages, with one of them up over 100% since January. Much of Wall Street believes that they have run too far, too fast. To a point, they are correct. However, homebuilder sentiment has been up the last five months.
Lennar Corp. (LEN) is up 82.8% YTD. Yet it seems to have the best current fundamentals out of any homebuilder out there. With a P/E ratio of 14.41, P/S of 1.97, PEG of 2.13, and positive earnings, Lennar has the strongest fundamentals. Currently, Lennar is one of only two of the strongest homebuilders traded that has positive earnings. Not only does it have positive earnings, but it also has EPS of $2.53. That is easily the best EPS out of any of the homebuilders. This play has the best fundamentals moving forward.
Toll Brothers (TOL) is the only other homebuilder that has positive earnings currently. Toll's EPS of $0.54 is a sign that the builder is slightly further along in the recovery process than most of its competitors. Toll Brothers has a P/E of 66.91, P/S of 3.53, and a PEG of 3.09. If the sector were under normal circumstances, these fundamentals would scream "run" to any investor. However, with the sector showing strong signs of a turnaround, the positive EPS shows Toll Brothers is slightly ahead of the curve.
PulteGroup (PHM) is up 155% YTD. In January, only the brave ventured into the homebuilder space. The most crucial factor in deciding which builder to buy revolved around who had the strongest balance sheet. At that time, Pulte was that company. It is still in the midst of the turnaround as it has negative earnings. PHM has a P/S of 1.39, a PEG of 5.09, and are expected to have positive earnings in the current quarter. Pulte's P/S is one of the best in the space, but with negative earnings and a PEG that is just a little too high to tolerate, this stock comes in third for best homebuilders plays.
The sector still has some serious pitfalls. KB Home (KBH) is a perfect example of those pitfalls. Currently, KBH has negative earnings, a P/S of 0.70, and a PEG of -$3.21. With a negative PEG ratio, this company is still struggling through the turnaround. Analysts aren't expecting positive earnings from KB this quarter or on the year. While KB still has a long way to go to resemble a healthy company, it doesn't seem to be in danger of becoming irrelevant. This is a play where I would wait to see the company form a stronger base before considering.
While the homebuilders have been on a tear all year, the space still has a long way to go in the recovery process. With QE from the Fed and the consistent positive homebuilder sentiment, there seems to be more room for these stocks to run. The key is to do your homework before getting in. Some of these builders are much further along in the recovery process than others.
Disclaimer: Investing involves an inherent level of risk. As such, never invest more than you can afford to lose. Before adding a position to your portfolio, always seek the advice from a licensed financial professional.
Disclosure: I am long PHM.