Homebuilder stocks powered to a new 52-week high on Friday and continue to be market leaders. The home-building space offers a handful of the best stocks to buy right now if you’re seeking market-beating ideas with relative strength. Today we’ll dig into three of the best components within this space and build trade ideas around them.
The Homebuilder ETF (NYSEARCA:XHB) is up 40% year-to-date and has avoided the trade war drama weighing on most other sectors. Talk of a slowing economy has been making the rounds and even showing up in the data for certain parts of the economy. But housing isn’t one of them. At least, not if you view the industry’s health through the lens of stock prices (which you should).
One of the driving factors behind homebuilding bullishness is the trajectory of interest rates. The 30-year fixed-rate mortgage average in the U.S. has fallen from almost 5% last year to 3.6%, marking a stunning turnaround to the cost for financing home purchases.
Let’s take a closer look at three homebuilder stocks.
Homebuilder Stocks to Buy: KB Homes (KBH)
Year-to-date Gain: 86%
The past two years have been incredibly volatile for KB Homes (NYSE:KBH), but that doesn’t mean we haven’t seen consistency. Last year, KHB stock trended lower all year and this year it has trended higher. In fact, 2018’s 50% drop has been offset by this year’s near-100% gain. There and back again in a symmetrical fashion.
At this point, KBH stock has everything going for it. Its price trend is increasing in momentum. Volume patterns signal heavy accumulation surrounded its past earnings release. And the relative strength is off the charts. The only thing that should give buyers pause is the overbought pressures arising after such a rip-roaring rally.
If profit-taking does arise, however, it will deliver a buy-the-dip opportunity worth pouncing on. To capitalize on continued strength into year-end, buy the Jan $36/$40 bull call spread for around $1.65.
DR Horton (DHI)
YTD Gain: 54%
While the rise in DR Horton (NYSE:DHI) hasn’t been as meteoric as KBH, it is impressive nonetheless. Like its predecessor, DHI stock’s bullishness this year has matched and surpassed last year’s bearishness. The stock already cleared last year’s peak and now sits at record highs.
It’s also not as stretched as KBH, so the fear of chasing shouldn’t be as high on this one. Earnings are coming around the corner, but the stock doesn’t have a history of moving a ton after the event, so your risk of holding positions into it isn’t as high as some high fliers.
The elevated risk does have implied volatility pumped slightly to the 36th percentile of its one-year range. But I think call spreads are still worth a shot if you want to lean bullish on DHI stock.
Buy the Jan $55/$60 bull call spread for around $1.60.
Lennar (LEN)
YTD Gain: 56%
Overall, the ascent in Lennar (NYSE:LEN) hasn’t been powerful as KBH and DHI stock, but it’s certainly making up for lost ground after this month’s earnings release. A flurry of accumulation days has surfaced, suggesting heavy institutional buying beneath the surface. At the same time, the trajectory of its uptrend has steepened, revealing increasing momentum, and solidifying its spot among the best homebuilder stocks to buy now.
Solid earnings numbers, coupled with robust technicals, creates a killer combo for buyers. LEN stock is slightly extended, but it’s foolish to bet against the trend.
Implied volatility is in the tank making long call spreads a lay-up idea here. Buy the Jan $62.50/$67.50 bull call spread for around $1.80.
As of this writing, Tyler Craig didn’t hold positions in any of the aforementioned securities. For a free trial to the best trading community on the planet and Tyler’s current home, click here!
