Homebuilder stocks tacked on gains Thursday, July 29, despite data this week showing that new home sales slipped 6.6% in June amid high lumber prices and limited supplies of other building materials. However, the homebuilder group's underperformance against the S&P 500 by around 6% over the past three months indicates that many of these challenges facing the industry may already be baked into stock prices, providing a contrarian trading opportunity.
- Homebuilders' underperformance against the broader market indicates that investors may have factored in headwinds facing the industry.
- PulteGroup (PHM) shares broke out from a three-month falling wedge pattern, which may trigger additional buying in the coming days.
- The SPDR S&P Homebuilders ETF (XHB) tested and subsequently rallied from a multi-month trendline on above-average volume, indicating that the bulls may be regaining control.
Below, we take a closer look at one of the nation's leading homebuilding stocks and the sector's flagship exchange-traded fund (ETF). We'll also analyze the charts and construct possible trading plays.
PulteGroup, Inc. (PHM)
PulteGroup, Inc. (PHM) primarily builds single-family detached homes, targeting entry-level, move-up, and active-adult buyers. Although based in Atlanta, the homebuilder operates in 40 markets across 23 states. On Wednesday, the company reported second quarter (Q2) adjusted earnings of $1.72 per share on $3.36 billion in revenue, with the top and bottom line growing 29.5% and 49.6%, respectively, from a year ago. Impressively, orders yet to be closed – known as backlog – improved 52% year over year. Trading at $55.06, with a market capitalization of $14.29 billion and yielding 1.06%, PulteGroup stock has added 27.69% on the year but tumbled nearly 8% since late April.
PulteGroup shares broke out from a three-month falling wedge pattern Thursday, which may trigger additional buying in the coming days. The stock also closed above the 50-day simple moving average (SMA), adding further conviction to the move. Traders who buy at these levels should look to lock in profits around key overhead resistance at $62. Protect against a failed breakout by setting a stop-loss order somewhere beneath the wedge pattern's top trendline at $53.
A stop-loss order is an order placed with a broker to buy or sell a security when it reaches a certain price. Stop-loss orders are designed to limit an investor's loss on a position in a security.
SPDR S&P Homebuilders ETF (XHB)
The SPDR S&P Homebuilders ETF (XHB) has an investment mandate to provide a return that generally corresponds to the S&P Homebuilders Select Industry Index. The underlying benchmark tracks an equal-weighted index of U.S. companies involved in the homebuilding industry. Leading names in the fund's portfolio of 35 holdings include sector heavyweights Lennar Corporation (LEN) and NVR, Inc. (NVR), as well as home decor and improvement plays like Floor & Decor Holdings, Inc. (FND) and Lowe's Companies, Inc. (LOW). Traders can easily enter and exit positions with the ETF's razor-thin 0.02% average spread and ample share turnover. XHB controls nearly $2 billion in assets under management (AUM), offers a 0.57% dividend yield, and has declined 1.5% over the past three months, despite gaining 31% year to date.
The fund's price has traded sideways to lower since mid-May as investors grew increasingly nervous that a shortage of building materials could halt or slow the housing construction boom. However, a successful test and subsequent rally from a multi-month trendline on above-average volume indicate the bulls may be regaining control. Active traders who take a long position should set a take-profit order near the ETF's all-time high at $80.82 and a stop under this week's low at $72.66.
A long position describes what investors have purchased when they buy a security or derivative with the expectation that it will rise in value.
Disclosure: The author held no positions in the aforementioned securities at the time of publication.