Rising interest rates took a bite out of homebuilding stocks last year. From peak-to-trough, the Homebuilders ETF (NYSEARCA:XHB) experienced a 35% decline that broke the back of its weekly uptrend. The deteriorating price action has led many to wonder if traders are sniffing out economic weakness on the horizon that will hamper the housing market.
The average 30-year fixed rate mortgage which sat as low as 3.41% in late-2016 rallied to just shy of 5% last year. While a mild rise in rates isn’t likely to price buyers out of the market, a large rise will. And, no matter how you spin it, a ramp like we just saw is significant.
But here’s where I think things get interesting. Interest rates have backed off quite a bit over the past two months, breathing new life into homebuilders, which might make this an industry worth bottom fishing in.
Here are three of the top homebuilding stocks to consider.
Toll Brothers (TOL)
Toll Brothers (NYSE:TOL) dragged the homebuilding sector lower last year, and it may be poised to lead it higher this year. 2018’s 43% intrayear decline created many bearish setups for short sellers to capitalize on, but in Q4 it finally carved out a clear bottoming pattern. The rally at the turn of the year completed the reversal and kicked off a fresh uptrend.
The 20-day and 50-day moving averages are both rising to confirm buyers’ newfound dominance in the short- and intermediate-term trends.
With TOL stock testing its 200-day moving average overhead, I suggest waiting for a pullback toward support at $34 or a breakout above $36.60 before buying.
Lennar (LEN)
Lennar (NYSE:LEN) outpaced TOL stock to the downside last year with a 48% intra-year decline. But the catalyst that arrested the descent should be emboldening buyers here. On Jan. 9, Lennar reported better-than-expected earnings and its share price scored a rousing breakout.
While its turnabout isn’t as mature as TOL, I like the groundswell in volume we’ve seen accompanying the nascent uptrend. Continued institutional accumulation should support the trend reversal and make price dips from here a buyable event.
If you’re a willing LEN stock buyer, I like selling the Feb $42.50 puts for around 70 cents to 80 cents.
D. R. Horton (DHI)
At -39%, last year’s beating in D. R. Horton (NYSE:DHI) wasn’t as severe as its predecessors. But the thrashing was enough to turn its trend across all time frames lower. Fortunately, the rally off the lows has been as impressive as TOL and LEN, making its budding uptrend tempting to bet on.
In the short run, DHI stock has become a touch overextended, so some backing and filling may be in order before a low-risk entry emerges. Watch for a pullback toward $37 or a breakout over $40 before pulling the trigger.
The stock has its quarterly earnings release slated for Jan. 25.
As of this writing, Tyler Craig didn’t hold a position in any of the aforementioned securities. Check out his recently released Bear Market Survival Guide to learn how to defend your portfolio against market volatility.
