The Housing Market is on the Mend -- and These 3 Stocks are Breaking Out

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Tuesday, August 28, 2012 - 6:00pm

by Jim Woods

The metrics in the housing sector are slowly but surely improving, and while the numbers are still light years away from where they were during the height of the housing boom, the trend is nevertheless higher. We received the latest data point on housing from the National Association of Realtors on Aug. 22, which reported that existing home sales rose to 4.47 million in July, a 2.3% increase from the prior month. The July numbers represent the first increase in the metric in three months.
 
In mid-August, we saw the number of applications for building permits rise to their highest level since August 2008. Those numbers were accompanied by a slight decrease in U.S. home construction in July, but judging by the market's reaction to the news, it is full speed ahead for homebuilders.

In fact, three of the biggest homebuilders have each had a stellar year, with all three recently breaking out to new, multi-year highs. These kinds of breakouts are music to the ears of momentum traders, as it means a nice opportunity in the space. If the positive trend in the housing space continues, we are likely going to see even more upside for homebuilders, and that augurs well for stocks such as Toll Brothers (NYSE: TOL), DR Horton (NYSE: DHI) and PulteGroup (NYSE: PHM).
 
Toll Brothers
As the largest luxury homebuilder in the United States, Toll Brothers has the enviable position of being a bit more sheltered from the wider housing bust than companies that build lower-priced homes. On Aug. 22, that positioning was rewarded, as the company reported its highest revenue since the recession of 2008. Toll Brothers said revenue for fiscal third-quarter jumped 41% to $554.3 million, while earnings per share rose to $61.6 million, or 36 cents, from $42.1 million, or 25 cents, in the same quarter last year.
 
Perhaps more importantly, Toll's net signed contracts rose 57% to 1,119 units during the May-July period, while its backlog jumped 59% to $1.62 billion. The company also forecasts home-sale revenue of $1.71 billion to $1.84 billion for 2012, and raised the lower end of its full-year home delivery outlook.

Wall Street certainly loved the fiscal house that Toll Brothers built, as shares surged 4% midway through Wednesday's session. Momentum traders who want to ride Toll Brothers' wave should jump on this stock now in anticipation of a rally through the remainder of the year.
 
DR Horton
Another homebuilder stock breaking out to new highs on solid fundamentals is DR Horton. The company reported a 14% increase in fiscal third-quarter revenue to $1.1 billion in late July, and though that metric was slightly below expectations, the stock wasn't the worse for wear, and has since pushed to new highs.

Like Toll Brothers, DR Horton also saw greatly improved results in net sales and backlog. Net sales increased 25% to 6,079 homes vs. 4,874 homes in 2011, and the value of those orders jumped 32% to $1.4 billion. The company's sales order backlog of homes under contract also surged, with a 31% gain to 7,311 homes.
 
Once again, this is a momentum play on strong data, and strong technical buying in the sector that's resulted in a 4% jump in DHI shares midway through Aug. 22 trade.
 
PulteGroup
The tale of strong momentum and strong fundamentals is also propelling our third homebuilder stock, PulteGroup. Like the previous two sector standouts, PulteGroup reported a big surge in earnings in its most recent quarter. The company saw earnings of 13 cents per share, which crushed consensus estimates for EPS of just 5 cents. PulteGroup also saw a 15% boost in quarterly revenue to $1.07 billion. New orders also were higher, climbing 32%.

 

Like TOL and DHI, PulteGroup shares were up big midway through the Aug. 22 trading session, jumping nearly 5%. If you want a momentum trade on a sector being fueled by optimism, improving macro-economic factors, and higher EPS and higher revenue, then these three breakout homebuilder stocks are for you.

Action to Take --> I recommend picking up shares of TOL with a stop-loss of $30.40. I think DHI is a good buy with a stop-loss set at $17.52. I also like PHM with a stop-loss at $12.33.

This article originally appeared on TradingAuthority.com as 3 Breakout Homebuilder Stocks

Jim Woods does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.