ISI Group thinks the move doesn’t bode well in the long term for home builders: "It speaks of prolonged economic weakness that ultimately may negatively affect the builders if job growth continues its puny pace."
But investors today were enjoying the short term, hoping a halt or slight reversal in the rise in rates will help spark home sales: BZH +4.4%, CVCO +4.8%, DHI +6.9%, HOV +5.3%, KBH +8.2%, LEN +6.5%, MDC +5.2%, MHO +5%, MTH +6.8%, NVR +3.9%, PHM +5.4%, RYL +8.7%, SPF +4.4%, TOL +5.1%.
Hedge funds, P-E firms, and REITs have raised more than $18B to purchase over 100K homes the last two years and - if AMH is any indication - find themselves with a lot more property than they can profitably rent out. It's more than an issue for the companies and their investors - one wonders how much of this unprofitable (and apparently about to slow) activity has boosted the housing stats.
Other stocks of interest include Silver Bay (SBY) and American Residential Properties (ARPI).
July new home sales fell 13.4% to an adjusted annual rate of 394K, far below expectations of 487K. The 394K pace is still 6.8% above the pace of one year ago. Given the current pace of sales, inventory rose to 5.2 months worth of homes from 3.9 in June.
The U.S. Home Construction ETF (ITB -3%). Weighted more heavily on building suppliers than the builders themselves, the S&P Homebuilders ETF (XHB -1.9%).
Off more than 20% since its May high, the iShares U.S. Home Construction ETF (ITB -1.6%) is officially in a bear market, notes Ryan Detrick. The previous 3 instances the ETF fell 20%, it declined another 7.7% in the following month.
Know your ETF: The S&P Homebuilders ETF (XHB -0.8%) has strongly outperformed the ITB during this 3-month slump.
While ITB's main holdings are concentrated in actual homebuilders like LEN, PHM, DHI, TOL, and NVR, top holdings in the XHB are supply companies like Lumber Liquidators, Lennox, Lowe's/Home Depot, and A.O Smith - a homebuilder can't be found in its top 10 names.
The market's more richly valued than you think, writes Jack Hough in Barron's, as Q4 S&P 500 (SPY) earnings are expected to rise 10.5% on just a 0.6% increase in revenue. "Where's that margin growth going to come from," asks S&P's Howard Silverblatt. "Most of us aren't exactly napping on the job as it is."
Avoid sectors particularly prone to estimates cuts like consumer discretionary (XLY) and telecom (IYZ), suggests Hough, but favor safer groups like tech (XLK, though Cisco last week calls "safe" into question) and health care (XLV).
A stock screen scoring companies by free cash yield as well as ability to still boost margins yields 5 top picks:
Pfizer (PFE) trades inline with a slow-grower like Merck (MRK) but maybe deserves a multiple closer to a fast-grower like Bristol-Myers Squibb (BMY).
Danaher (DHR) - it trades at what seems like a pricey 18x earnings, but just 15x projected free cash.
Lear (LEA) at 10x earnings is growing faster than the auto market as a whole as it picks up market share and electrical content in cars is rising.
Oracle (ORCL) and Qualcomm (QCOM) have both seen earnings growing faster than their share price of late, leaving them attractively priced.
The screen also yielded 3 to avoid:
Tiffany (TIF) at 20x earnings is pricing in faster earnings growth in 2014. Praxair (PX) expectations are for a near-doubling in earnings growth to 13%. Lennar (LEN) with 32% projected earnings growth remains pricey even as the housing recovery appears to be slowing.
Struggling home builders are jumping ahead on respectable but in-line housing data, as at least overall construction has climbed in two of the past three months.
"Looking at the underlying trend in one-family starts suggests that the pace of groundbreaking activity is actually fairly steady," an RBS economist says, unconcerned about July's drop in single-family starts since "anecdotal evidence suggests builders may be holding back on new construction in part to reap the benefits of higher prices."
Raymond James "continue[s] to believe we are in the early stages of a sustainable up-cycle in U.S. housing," and favors Toll Brothers (TOL +1.5%), which it sees as less sensitive to mortgage rates.
Weeding out volatile multiple-family figures, July single-family starts of 591K fell 2.2% from June's revised figure of 604K. The 591K print is the lowest since last November as higher interest rates sap some of the market's energy.
July building permits of 943K is 2.7% above June's revised rate of 918K.
A few homebuilders premarket: TOL +0.7%, LEN +0.6%, PHM +1.2%.
The NAHB builder sentiment index rises to nearly an 8-year high of 59 in August - the last time it was higher was 61 in November 2005. The move comes with the pace of new home sales nearing 500K annually, 38% higher than a year ago, but off from the 700K consistent with a healthy market.
The HomeBuilders ETF (XHB -0.4%) continues its summer decline, though it has bounced significantly since the NAHB print hit the tape.
The Homebuilders ETFs (XHB -2.6%), (ITB -4.3%) slip after earnings from PulteGroup (PHM -9.3%) and D.R. Horton (DHI -8.2%), with Pulte notable for reporting a big decline in orders (interest rates on the rise again aren't helping). Goldman reiterates its Sell rating on Pulte, noting the need to be selective within the sector. Others: Toll Brothers (TOL -2.4%), KB Home (KBH -5.8%), Lennar (LEN -4.8%), and also reporting M/I Homes (MHO -7.3%), and Ryland (RYL -8.1%). One homebuilder/landowner caught up in the selloff is UCP, Inc. (UCP -2.4%) - a promising play that may be the victim of a poorly-timed IPO, says SA Pro's Money Investor.
Homebuilders (ITB -1.4%) tumble across the board after existing June home sales slipped a seasonally adjusted 1.2%. Rising mortgage rates were supposed to boost short-term demand as potential buyers aimed to lock in mortgages before rates went even higher, but the June report showed no sign of it. KBH -2.6%, RYL -2.5%, MTH -2.5%, DHI -2.2%, MDC -2.2%, HOV -2%, LEN -2%, PHM -1.6%, TOL -1.4%.
With house prices rising, profits healthy and financing available, large publicly traded house-builders such as Lennar (LEN), NVR (NVR) and Toll Brothers (TOL) have been buying up their smaller privately held rivals, which have had trouble getting funding for new developments. Ryland Group (RYL) is onto its third acquisition in a year. To stay independent, some private companies have listed, with three IPOs in the sector taking place since January.
Lit up bright red on an otherwise quiet day are the homebuilders (XHB -1%). Lennar's (LEN -4.1%) big move puts it down 8% YTD as the benign interest rate scenario of the past many months/years becomes less so. Others: Pulte (PHM -3.3%), Toll (TOL -2.2%), Ryland (RYL -2.6%), D.R. Horton (DHI -4.6%).
firstinsnow+ FollowFollowing- Unfollow|Send Message6 Mar 2013
$LEN 3+ bucks since last Wednesday, still going up.[maybe]
View all 0 replies
LEN vs. ETF Alternatives
Lennar Corp is a homebuilder and a provider of financial services. Its homebuilding operations include the construction and sale of single-family attached and detached homes, and to a lesser extent multi-level residential buildings.