Homebuilder stocks like DR Horton (NYSE:DHI), Lennar (NYSE:LEN), and Toll Brothers (NYSE:TOL) have traded like momentum stocks. They fall in and out of investor favor quickly and go on long runs in either direction. This makes them hard to trade.
Luckily we can use charts to pick the right ones to bet on and at which levels. In fact, there are definite opportunities in the sector. Here we focus specifically on DHI, LEN and TOL.
But first the macro. This week the stock market has been violently whipsawing from extreme dips to harsh bounces. The most recent came yesterday morning due to a sharp crash in bond yields. Bond prices spiked and the media rhetoric went wild.
Equity investors panicked at first, but then mostly realized that this was a mere technical development, not a fundamental change for stocks. The bottom line is that lower yields are good for stocks and we still have low rates for a long time to come. Homebuilder stocks should do well going forward.
The central banks are still committed to inflating and maintaining global economic expansion. And since we have full employment in the U.S., we will need to build houses.
Today I focus on three stocks that are prime candidates for trading into next year.
Homebuilder Stock to Invest In: DR Horton (DHI)
DHI stock has maintained a higher low and higher high ascending trend that started from the Christmas bottom. Moreover, it has already triggered a weekly bullish pattern that should target $54 per share or higher.
There will be resistance along the way around $50 per share but as long as the equity markets in general don’t collapse, DHI stock has a legitimate chance at setting new highs sooner rather than later.
Doing this does not mean that DHI would have to defy the odds. It merely sells at a modest 11 price-to-earnings ratio and one time sales. And at two times the book value, DHI stock price is reasonable. Owning the shares at these levels is not likely to be a debacle for the long term. In addition, DHI stock pays a dividend, so it rewards its stockholders while they wait for capital appreciation to happen.
Similar to DHI, LEN stock has maintained a nice ascending trend off of the December lows. However it has failed to maintain the higher-high inside the channel.
Furthermore, LEN has fallen a pivotal level around $47 per share. As long as it holds then LEN stock still has a chance at breaking out of the recent failure levels around $54. But if the stock falls below $46, it could trigger a bearish pattern to target $42 per share. While this is not a forecast, it is a bearish scenario that can unfold.
If I am long Lennar stock, I can wait patiently because it only sells at 8 price-to-earnings ratio and under one time sales. So clearly there’s not a lot of fat on this bone.
Technically, LEN stock is not as bullish in posture as DHI is. Between the two, and from a trading perspective, I would favor DHI over LEN stock.
Toll Brothers (TOL)
TOL stock resembles that of LEN. In essence, it is well-above the 2018 trouble spots, but also well below the highs of this year. TOL stock also sports a bearish complex head-and-shoulder pattern where the neckline is just below $35 per share. Losing that support level may invite sellers to retest $32. This is not a forecast but a cautionary note to those looking to buy TOL stock.
On the flip side, if the bulls can overcome $36 then $37.3, they can then target $45 per share. Above that, the bulls can also trigger another bullish pattern to recover the highs of the year. Valuation is also not a concern in TOL stock price. It too sells at a very modest 7 P/E, and under one time sales and at book value.
Clearly all three stocks have shed enough froth that are mostly meat. So owning any of them for the long-term is likely a modest risk with a decent upside. Of the three, I favor DHI stock. While I still am okay owning LEN or TOL, DHI is the one with the best upside setup that is already ongoing. Meaning there is less hopium in it than the others.
To that point, DHI is up 38% year-to-date. Compare that to LEN up 10 points less and TOL only up 10% for the same period. Clearly Wall Street also favor DHI as I do here.
It is important to note that we are still trading the markets on headlines. At any moment we are liable to get a tweet from the White House or a news release from the state median China and turn this whole thing upside down.
So I don’t want to take any big bets so size does matter in this case. I would start small to leave room for adjustments when needed.