Recent trends in economic reports suggest the housing market is slowly but perhaps steadily showing an upturn in both activity and optimism. The Fed’s decision to keep rates low is a critical component of the rally, and on Monday home builder Lennar (NYSE:LEN) released earnings for the quarter ended August 31 2012.
Let’s take a look:
Event: Lennar continued a trend of strong operating performance in the housing sector. Lennar said it earned 40 cents a share in the period compared to Wall Street estimates calling for 28 cents per share. Net orders rose 44% to 4,198 boding well for future periods as income is only booked when a home sale closes. Shares of Lennar were up initially by 5% in pre-market trading, but ended the day down 1.5%.
Analysis: Another indicator that the homebuilders are enjoying a strong rebound. The Lennar results follow a strong report by KB Home (NYSE:KBH) on Friday. KB shares rose some 15% after its report. Lennar gained in sympathy on Friday. With the overall market weak on Monday, it is not surprising to see Lennar struggle a bit. Keep in mind most homebuilder stocks including Lennar have doubled in value over the last 12 months.
The rally in Lennar has taken its valuation to above 2 times book value. Investors appear to be ignoring traditional valuation metrics and instead are focusing on earnings. In addition Federal Reserve QE Infinity indicates that interest rates will be conducive to strong growth in the group. It is not unreasonable to believe that book value will rise quite quickly as a result thus making shares less pricey.
Action: We have seen momentum stocks in the organic food space display a similar trading pattern. The early reports blast off higher, while the later reports struggle to hold value. With the overall market overbought, look for Lennar to continue to struggle.