While homebuilding stocks certainly haven't escaped this week's ferocious broad-based market sell-off, they remain one of the only industries still in the black this year – gaining 5% compared to the S&P 500's manic 7.8% slide.
With near record-low interest rates and a tight labor market setting a favorable backdrop, it's easy to see why investors have set up home in the sector. After December's blowout housing data, analysts had expected activity in January to have moderated somewhat.
However, pending home sales surged 5.2% last month, indicating no slowdown in buyer demand. Furthermore, total housing inventory in January shrank 10.7% year over year (YoY) but increased 2.2% compared to December, helping to alleviate concerns of dwindling supply reducing affordability.
Below, we take a closer look at three leading homebuilding stocks and turn to the charts to explore possible trading opportunities.
D.R. Horton, Inc. (DHI)
Arlington, Texas-based D.R. Horton, Inc. (DHI) primarily builds single-family detached homes, targeting the entry-level, move-up, luxury buyer, and active adult segments. Despite the stock's recent run-up in price, its forward earnings multiple of 11 sits in line with its five-year average. On the earnings front, the 42-year-old homebuilder has topped Wall Street's bottom-line expectation in the past four consecutive quarters. D.R. Horton stock has a $20.47 billion market cap, issues a 1.24% dividend yield, and is trading 6.23% higher on the year as of Feb. 28, 2020.
This week's sharp sell-off appears to be stabilizing at the $56 level, with price finding support from a long-term trendline and an area of November and December consolidation. Before entering, traders should consider waiting for a candlestick reversal pattern to form, such as a hammer, to confirm improving sentiment. Set a profit target back toward the 2020 high at $62.54, but be prepared to cut losses if price fails to hold above $54.
PulteGroup, Inc. (PHM)
PulteGroup, Inc. (PHM) constructs and sells single-family detached, townhouses, condominiums, and duplexes through brand names such as Pulte Homes, John Wieland, and Neighborhoods. The $11.27 billion Atlanta-based company also provides its customers with mortgage financing and title agency services through its financial services business. Analysts have a 12-month price target on the stock at $48.20, representing 15% upside potential from Thursday's $41.74 close. As of Feb. 28, 2020, PulteGroup shares have gained 7.58% and offer a 1.14% dividend yield.
The stock started this year breaking out from a tightly formed ascending triangle – a popular continuation pattern. Amid this week's broad-based selling, traders should watch for buying opportunities near the triangle's top trendline, which now provides support around $40.50. Those who trade the stock should place a stop-loss order beneath the January low at $40.91 and anticipate a move up to crucial overhead resistance at $47, looking for a test of the January and February swing highs.
KB Home (KBH)
KB Home (KBH) builds and sells residential homes through four geographic-based divisions: West Coast, Southwest, Central, and Southeast. The homebuilding giant also invests in land acquisition and development to support future building projects. Net order growth jumped 38% in the fourth quarter, driven by demand for the firm's built-to-order products. Looking ahead, the company expects first quarter housing revenues to come in between $910 million and $917 million, indicating YoY growth of 18%. Trading at $34.50 with a $3.36 billion market cap and 1.02% dividend yield, the stock has added 0.93% year to date as of Feb. 28, 2020.
Traders should monitor the $32 level, where price encounters a confluence of support from the November and December swing lows and the rising 200-day simple moving average (SMA). A move down into this area also coincides with an oversold relative strength index (RSI) reading, increasing the probability of a price reversal. In terms of trade management, think about booking profits near this month's high at $40.5 while protecting capital with a stop positioned at $31 or below.