Last night, KB Home (NYSE:KBH) reported earnings, and the knee-jerk investors spiked KBH stock up 3% in aftermarket trading. Despite the price action, nothing about KB Home’s report was awesome … it was a mixed bag at best. Lennar (NYSE:LEN) also reported similar results this morning and it, too, is rallying on the headline.
KBH management beat earnings expectations but missed their sales estimates. While they delivered a profit this quarter versus a loss, revenues were down 7% year-over-year. It is also important to note that the average selling price also fell 5%.
To be fair, this was a challenging quarter for everyone especially home builders. Stocks, in general, were coming off a nasty crisis of sentiment from late 2018, which ended in a Christmas crash. Luckily the equities made an extraordinary comeback.
Case in point, KBH came into the earnings report up 26% year-to-date, which is 14 percentage points better than the S&P 500 and 9 percentage points better than the SPDR S&P Homebuilders ETF (NYSEARCA:XHB). Clearly, the stock has upside momentum on its side in spite of the added disadvantage that its fundamentals are hampered by rising mortgage rates.
The most recent U.S. Federal Reserve flip on rate hikes should help ease some pressure off KBH. So now they can continue the recovery process from a difficult 2018. New orders are down 4% but it looks like mortgage rates peaked in the fall of last year. Indeed, the CEO was confident that the conditions are improving for a better 2019.
And therein lies the opportunity. This is a matter of a confident management team expressing an optimistic forecast to support the chart action. KB Home stock already has a technical breakout opportunity just above yesterday’s levels.
If the bulls can sustain this earnings pop, they can overshoot higher to target $28 per share. But there will be strong resistance from the around $26 per share as it was a major ledge from which KB stock failed in September.
Back then, they reported earnings and the reaction was a big rally that completed reversed and started a 35% correction that ended November. The good thing about that is that the stock did not make another low in December when markets did theirs. So, in essence, it has since been setting an ascending trend of higher lows. This is constructive price action that the bulls can work off.
So, for those long KBH, stay in KH Home stock to ride out the upside potential. For those aiming to trade the momentum, this one could be brewing another leg higher, as previously noted.
If I am trading the stock tactically and for the short term, I don’t want to turn the trade into an investment. Regardless, fundamentally KBH trades at a price-earnings ratio of 8x, so clearly it’s cheap. Owning it for the long haul is not likely to be a giant financial risk as there is value below.
There is another potential upside catalyst for KBH. Most analysts who cover the stock have it as a hold. After they see the stock moving they could be compelled to upgrade their rating and price target of the stock so they don’t miss the bus.
In short, KBH stock is rallying on a mixed report so the bulls are in charge. If the macroeconomic headlines cooperate there is more upside in KBH.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. You can follow him as @racernic on Twitter and Stocktwits.