Do you know who should be celebrating the recent market turmoil? Homeowners and prospective homeowners. Mortgage rates have plunged alongside falling bond yields, drastically reducing the price of financing a home purchase. Homebuilding stocks are taking note, and many just jumped to multi-year highs.
Today we’ll look at three of the best stocks to buy in the industry.
The coronavirus and crashing Chinese equities sparked a classic flight to safety trade. Short of a few exceptions, risk assets have stumbled while safe havens like Treasury bonds soared. See oil, copper and small-caps for evidence of the exodus out of economically sensitive assets. The ten-year yield, which was approaching 2% last Christmas, is now courting 1.5%.
Homebuilding stocks saw sharp increasing momentum this month, and many have pulled back for four straight days. The retracement is creating a perfect buy-the-dip opportunity.
Let’s take a closer look at how to capitalize.
Homebuilding Stocks to Buy Now: D.R. Horton (DHI)
D.R. Horton (NYSE:DHI) might be my favorite of the bunch. Last month’s launch carried DHI stock to a new record, so we don’t have any old resistance zones to worry about. The Jan. 20 earnings report topped off the rally with a solid earnings beat to keep the dream alive.
It’s always bullish when a stock ramps for the two weeks ahead of earnings and still finds buyers to jam it higher afterward. Spectators reticent to chase should be cheering the current pullback because it creates a lower-risk entry. Volume during the retreat has been low, suggesting garden variety profit-taking versus trend-killing distribution.
With the 20-day and 50-day moving averages rising in support, I suspect buyers will emerge sooner than later to halt the descent. Implied volatility tumbled after earnings and now sits at the 12th percentile. The cheap options have me favoring long calls.
The Trade: Buy the March $60 call for around $1.40.
The pattern in PulteGroup (NYSE:PHM) echoes that of DHI stock. Although the Atlanta-based homebuilder hasn’t yet cleared its 2005 highs, it’s incredibly close and boasts an uptrend that just saw a powerful momentum surge. Like DHI, PHM stock rallied on earnings amid heavy volume, even after running strong during the previous two weeks.
Its four-day pullback is also creating a lower-risk entry and is void of any trend-killing distribution. The dip may keep dipping, but we’ve retreated far enough to consider deploying bull trades.
Long calls or call spreads are once again my strategy of choice.
The Trade: Buy the April $45 calls for around $1.90.
KB Home (KBH)
KB Home (NYSE:KBH) rounds out today’s trio with a clear buy setup of its own. Its uptrend tagged a new 52-week high last month after rallying back from a down gap post-earnings. Although its momentum isn’t as stark as DR Horton and Pulte Homes shares, it’s benefiting from the low mortgage rate tailwind that’s boosting the entire industry.
Yesterday’s touch of the rising 20-day moving average brought buyers to the yard, and we now have a textbook doji reversal candle suggesting the pullback could be at an end. Look for a break above Monday’s high ($38.10) to confirm buyers are taking over. Consider $40 the first upside target. A break below the 50-day moving average near $35.50 would change my outlook. Until then, it’s game on for bulls.
The Trade: Buy the April $38/$42 bull call spread for around $1.45.
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!