Texas-based homebuilder D.R. Horton, Inc. (DHI) gave the sector a much-needed boost Tuesday after the company topped Wall Street's quarterly earnings expectations. The upbeat report comes in the wake of disappointing data last week that showed new home sales in the United States contracting 15.4% in March.
The firm – which withdrew its 2020 guidance earlier this month due to the coronavirus pandemic – posted a second quarter profit of $482.7 million, or earnings per share (EPS) of $1.30, easily outpacing analysts' forecast of $1.12 and registering EPS growth of 40% from the year-ago period. Management credited the company's geographic reach and affordable housing options across its various brands for the earnings beat.
Revenue of $4.5 billion for the period also exceeded expectations. However, the homebuilder cautioned that net sales were down 11% April-to-date compared to last year as the health crisis had begun to slow new orders and increase cancellations.
Performance-wise, D.R. Horton stock has fallen just over 10% on the year and issues a 1.66% dividend yield as of April 29, 2020. Let's take a closer look at the homebuilder's chart to identify possible trading opportunities.
The company's better-than-expected report acted as a catalyst for a breakout above an ascending triangle and key horizontal line resistance. Swing traders should eye a move back to the 2020 high at $62.54 but exit quickly if the stock fails to hold above the breakout level at $42.50. The trade offers an enticing 1:3.5 risk/reward ratio ($4.44 risk per share vs. $15.57 reward per share), assuming a fill at yesterday's $46.93 closing price.
Below, we also take a look at one of D.R. Horton's key rivals and a thematic-based exchange-traded fund (ETF) that specifically tracks companies that operate in the homebuilding industry.
Lennar Corporation (LEN)
With a market capitalization of $15 billion, Lennar Corporation (LEN) is the nation's largest homebuilder, targeting first-time, move-up, and active adult homebuyers. The Miami-based company reported Q1 EPS of $1.27 on revenues of $4.51 billion, with higher deliveries and continued operating leverage making a positive contribution to the bottom line. Although Lennar stock has slipped 10.79% year to date, it has outperformed the residential construction industry average over the same period by nearly 9% as of April 29, 2020. Investors also receive a 1.10% dividend yield.
The homebuilder's share price plunged below the December 2018 low during last month's coronavirus-driven sell-off but quickly recovered above that level. Upside momentum gathered pace Tuesday, with the stock gapping above an ascending triangle and the 50-day simple moving average (SMA) – a bullish move that may trigger further short-term buying. Those who enter here should think about setting a take-profit order near $70, where price may encounter resistance from the 52-week high. Manage risk by placing a stop beneath the April 27 low at $42.98.
Direxion Daily Homebuilders & Supplies Bull 3X Shares ETF (NAIL)
Launched in 2015, the Direxion Daily Homebuilders & Supplies Bull 3X Shares ETF (NAIL) has an investment mandate to return three times the daily performance of the Dow Jones U.S. Select Home Construction Index. The fund, through its geared exposure, allows active traders to take an aggressive bet on homebuilding companies. Consider using limit orders when placing trades to combat the ETF's wider 0.55% average bid/ask spread. NAIL holds $41.18 million in net assets and issues a 0.65% dividend yield but has copped an 80% hammering so far this year as of April 29, 2020.
Despite the fund's steep year-to-date decline, it has gained 355% from its March 18 capitulation low at $4.76. Homebuilder bulls continued to exert their dominance yesterday, driving the ETF above a six-week ascending triangle on increasing volume. Those who open a long position at these levels should target a move up to $40, where the price is likely to find significant resistance from a horizontal trendline connecting the June 2019 swing low and March 2020 breakaway gap.