Homebuilding stocks had a fantastic year in 2012, with many stocks doubling or even tripling in price. However, 2013 has not been as favorable, with higher interest rates capping enthusiasm and leading to investors taking profits.
I see a lot gurus and media types suggesting this is a good time to start buying the builders in anticipation of a better 2014 for the companies. They point to housing price recoveries in many segments of the market and suggest that we are in the early stages of a full-blown housing recovery. While this sounds like a good idea, the data from Portfolio Grader suggests otherwise.
If you look at the major home builders with Portfolio Grader, the vast majority of them are ranked “sell” or “strong sell.” The worst ranking in the industry belong to DH Horton (DHI). This stock gets the only “F” in the industry, in spite of being the largest builder by revenue in the United States. Many of the other better-known builders such as Toll Brothers (TOL), Pulte Homes (PHM) and Lennar Corporation do not fare quite as poorly, but are still ranked “D” and are currently “sells” in Portfolio Grader.
If you must play the homebuilders, your best choice may be Ryland Group (RYL). The stock is ranked a “hold” with a grade of “C” right now, but that’s primarily a result of the poor quantitative grade caused by persistent selling. The company is seeing the best order rates in the industry with a 57% increase in new orders in the second quarter. It was their best quarter in the past six years and helped them to a 68% revenue increase in the quarter. Analysts have been slow to recognize how well the company is doing, and Ryland has posted four strong positive earnings surprises in a row. The company gets an “A” for its strong fundamentals, and when the builders do turn the corner, this stock should lead the way higher.
It is best to avoid bottom-fishing this industry, especially in light of today’s housing starts report. New starts fell for the fourth month in a row as higher rates and consumer uncertainty continue to weigh on the housing markets. However, if you cannot resist the allure of the sector, go with the stock with the best fundamentals and buy shares of Ryland.
Louis Navellier is the editor of Blue Chip Growth.