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Homebuilder Stocks Go Wild, But What Now?

If you haven't already jumped in, it's time to be patient


Lennar‘s (NYSE:LEN) earnings report Wednesday triggered an explosion in that stock, and in the homebuilder sector as a whole.

Lennar stock jumped over 7% on the news, and it was not alone. Fellow homebuilder KB Homes (NYSE:KBH), a recent underperformer, finished up 11.95%, and Beazer Homes USA (NYSE:BZH), a stock recently recommended in this space, was up 5.6%. The iShares Dow Jones U.S. Home Construction ETF (NYSE:ITB) also rose a strong 3.5% on the day.

Lennar’s fourth-quarter earnings of 16 cents per share were down a penny year-over-year, but revenue was up 11% and margins also improved nicely. Analysts at Ticonderoga Securities were crowing over the report, saying that Lennar had started the homebuilders group off on a strong note for 2012.

Lennar has been a spectacular yet steady performer since last October, rising from a low of $12.74 to yesterday’s close at $22.25.

Lennar LEN
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Furthermore, a look at the three-year weekly chart shows LEN breaking above some solid long-term resistance with Wednesday’s rally. The 50-day moving average moved above the 200-day moving average in November, a beneficial technical pattern known as the “golden cross.” Furthermore, almost 15 million shares traded yesterday and 10 million Tuesday confirm this breakout is for real.

Investors Beware

Is it too late for investors join the homebuilder party and buy Lennar or the index at large?

Initially, unless you are a short-term trader, wait for a pullback. Chasing stocks after they have run up 7% is a sure-fire way to get burned. Plus, the RSI and stochastic indicators are now well into overbought territory, with the RSI above 70 and the stochastic above 80. It also is typical for analysts to recommend a stock or sector after a big move higher, which squeezes the last bit of money out of the little guy before the stock pulls back.

You don’t want to play that game.

I think overall, 2012 will be a very good year for homebuilder stocks. I don’t think earnings and revenue will be tremendous, but they probably will look great when compared to previous years. Even a dim bulb lights up a dark room.

If you already are invested in homebuilders, simply hold onto your shares for now. But if you are looking to get into the group, it would be prudent to wait for these stocks to pull back. Lennar easily could retreat about 5% to the $21 level. Of course, another possibility is to dollar-cost average into a position so you are not buying at the top.

It was easy to get caught up in “Homebuilders Gone Wild,” but investors should use an ounce of caution before jumping on the bandwagon with both feet.

As of this writing, Ethan Roberts did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media,

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