Buy This, Not That: Are These 5 Homebuilders Built to Last?

Shah Gilani|April 24, 2024

Talk about timing…

It’s homebuying season… as mortgage rates tick back up.

That’s causing supply issues. Existing homeowners are reluctant to give up their ultra-low rates… and potential buyers are reluctant to commit to such high rates.

But it’s good news for homebuilder stocks… who are seeing a boost in demand.

So today… we’re looking at five of the biggest homebuilders out there.

Their balance sheets are strong… as are their price charts.

But are these stocks built to last?

Or will higher rates demolish their momentum?

I dive into the numbers… and tell you exactly how to play it…

All in the latest episode of Buy This, Not That… your exclusive guide to the stocks that are worthy of your money – NOW.

Click on the thumbnail below to watch.

 

TRANSCRIPT

Hi everybody, Shah Gilani here with your weekly BTNT, as in Buy This, Not That.

Mortgage rates are rising. The 30-year is knocking on 8%, going who knows how high.

Guess what? We’re going to talk about homebuilders today. What to BUY, what NOT to buy.

If I sound like I’m repeating myself in this video, it’s because I am. These homebuilder stocks have done a lot of the same.In fact, you can probably overlay each of their charts on one another and scratch your head and go, this is deja vu all over again.

They’re acting the same way and for good reason. Because homebuilders’ stocks have been solid.

Why? Because we’ve got supply issues.

We’ve had supply issues since Covid, so that hasn’t changed much. And we have a lack of inventory, and we have folks not being able to sell their houses now because mortgage rates have gone up. They’re taking their houses off the market. You got the issue coming up in the summer with what’s going to happen with the case against the realtors and charging 6% commission.

How is that going to pan out? What’s that going to do for sales?

Well, here we are coming into the homebuying season. So let’s take a look at the homebuilders.

First up is going to be – I’m going to go with the biggest boy of them all – D.R. Horton. Symbol is DHI.

D.R. Horton is trading this morning – it’s Wednesday – at $148 and change shortly after the open.

It’s got a great balance sheet. This is an almost $50- just shy of $50 billion market cap company, with $37 billion in revenue, a wonderful profit margin at 13.4%. That’s great for a homebuilder.

Quarterly revenue, year over year, is up 14%. Nice.

Quarterly earnings, year over year, earnings growth, is up 24%.

I like D.R. Horton. The stock has gone sideways lately, but I think you could buy the stock.

Would I chase it up here and buy it right here at $148? No. I’d like to see if this thing can drift down to $142. I would certainly buy it around $139 to $142. I’d be pretty happy with it there because there’s support down there.

And I like buying the stock near its support because I’m not so sure how these homebuilders are going to do… given the rise that they’ve had, given the fact that mortgage rates are ticking back up, given the fact that if we continue to see higher for longer rates, which is the expectation now, then mortgage rates will remain elevated, and maybe homebuyers will start to balk at doing anything and wait for rates to come down.

That could leave homebuilders with a lot of inventory. So I’m not so sure I want to be holding on a “I’m really happy” basis here because I’m not so sure that we haven’t seen the best of it so far from homebuilders.

But, yeah, I would take a shot down there, the $139 to $142 range, with a maybe 10% stop. You just have to be aware of your levels on something like DHI. But I do like it here.

There’s no dividend to speak of, so you’re not buying it for that. You’re buying it because you like the space. I like the space, but I’m cautious.

Next up is Lennar, a very popular builder. Lennar builds everywhere. It’s a very well-run company. The symbol is LEN.

It’s had a nice run up. It’s going sideways a little bit in here. It’s trading at $156.50 right about now.

Again, this is a $43 billion market cap company with $35 billion in revenue. Nice.

The profit margin is 11.6%, not quite as nice as D.R. Horton, but its quarterly revenue growth, year over year, is 12%-plus. Quarterly earnings growth, year over year, is 20%-plus.

So, again, looking pretty good. Tiny dividend, not even worth speaking about. We certainly wouldn’t buy it for its dividend. It’s the same story as D.R. Horton.

You want buy it around support and see if you can get a bounce on support. Support is at $148. It’s trading at $156 now. I wouldn’t chase it up here because I don’t know where it’s going to go.

It could go back to its recent highs, all-time highs around $172. But that’s not the kind of game I play, to buy a stock here and see if it can get to $172, given that it’s not a tech company or something I think has got the juice to do a lot better.

But, certainly, as far as the stock goes, it’s in a great position right now. If you own it, then put a stop in there to protect your profits because you’ve had a nice run.

I’d buy it with maybe a 10% stop. This is could turn out to be a good long-term play, but if not, you just don’t want to get shaken out, and wish you had never bought it. So put a stop in there, because there’s going to be time to revisit some of these if they go lower.

So, again, let’s see if you can’t get a ride out of it.

Next up is Hovnanian Enterprises.

Now, Hovnanian builds a little bit lower end, more middle class, a little bit lower-end stuff, but they do really well.

This is a small cap relative to the other builders. Hovnanian, HOV, $934 million market cap.

But I like Hovnanian. I like what they do. I like the stock. It’s rolled over a little bit. I’d say flattened out.

Again, it had a nice run, nice pop, and has been on a nice move higher for some time. It’s enjoyed the ride, but it’s flatlining in here and maybe trending down a wee bit. So I’m not so sure I want to jump in.

I would maybe look at trying to bottom fish and buy its support at $125. It’s trading at $149 now. I don’t know that I’d buy it here just based on the chart.

Again, $2.83 billion in revenue on a $934 million market cap. That’s great revenue, people. Profit margin, 7.5%. Again, you know, that’s just the nature of their product.

The stocks had a huge 8%-plus pop yesterday. It’s doing well. It’s held support around $120, and it’s held support at $128 to $129.

It’s come down to $125.63. So I’m looking to buy it around there for a pop back higher. The 200-day is $121. So, again, a tight stop here. If you’re wrong, you give up a little bit of cash and you move on. But I do like it.

The balance sheet is not quite as robust as the big boys, but it’s still pretty decent. I wouldn’t call it great.

Certainly wouldn’t call it robust, but it’s a decent balance sheet.

What I don’t like about this one is the debt to equity at 188%.

Quarterly revenue growth, year over year, is 15%. Quarterly earnings growth, year over year, is 27%.

So pretty good numbers. But, again, get in there at support and use a tight stop, people, and give it a run. But, again, these aren’t worth chasing here, in my opinion.

Next up is Toll Brothers.

Now, Toll Brothers is a higher-end builder as far as product goes. It’s more on the expensive side for sure. And, generally, it holds up well. Even in downtrending housing markets, the price point is much higher. The communities they build are very high end.

So I like Toll Brothers. I’ve always liked Toll Brothers. Again, the chart really had a really nice run. It’s at $119 now. There’s support at $110 to $111.

I’d maybe give it a shot down there with a 10% stop. And, again, these are tight stops I’m talking about here. I just don’t want to chase this because I’m not sure where it’s going to go if rates are going to be higher for longer and mortgage rates stymie buyers. Then we might see a little backup in the housing sector and also in the homebuilders.

Now, quarterly revenue growth, year over year, is 9.4%. Quarterly earnings growth is 25% year over year. So, again, good numbers for Toll Brothers.

They got more debt, but it’s easily manageable.

I would probably try to buy at $110 to $112.

Depending on your viewpoint, if you have a 10% stop in there and the market looks good, you get down to that stop, and you don’t sell. Maybe you decide to buy a little more down there… and this is true for all of them.

It’s really a function of where we get to, where we are with markets, where we are with rates, when and if these stocks come down and touch that support or their secondary support, and if you buy them at support and then you’re looking for your next level of support. When we get to that next level of support, were you thinking about getting stopped out?

And, again, 10% is a random number. I prefer to look for support at 10% to15%, somewhere around there, and I want to see what the stock does there. So it’s not just a blanket 10%. I’m just throwing it out there to say don’t go crazy on these homebuilders, because they’re a little bit more speculative right here because of the run that they’ve had.

Last but not least is KB Home. Symbol is KBH. KB Home, the old Kaufman Broad.

Again, the chart looks very similar. It had a nice pop yesterday. It’s pretty flat today, trading around $65.50.

As far as quarterly revenue growth, not so great here at 6%. Quarterly earnings growth, year over year, is 10%, 10.5%. So not the greatest, but the stock has been a steady gainer.

You can’t fault that, and it enjoyed a really nice pop yesterday as all the homebuilders did.

It’s got support at $58, so I would probably take a shot at $58, buy some stock at $58, $57, somewhere around there. The 200-day is at $56. You could pick up some stock right in there and if it holds the 200-day moving average, then you’re in good shape. Otherwise, look for support below that.

Not sure where it is. Maybe put in your 10%, 15% stop. Look for where you’re going be comfortable. And, again, where you put your stops is a function of when you get close to them, make sure you understand, maybe you don’t want to have a stop and maybe you want to buy a little more if everything looks good, and some of the selling has just been basically been profit-taking.

Then that’s how you want to trade these, and if you are on the right side of them, they become an investment and they continue higher, then you know what to do. You just raise your stops up, and use a trailing stop. But all these homebuilders are in the same boat.

Again, if you own them, use a trailing stop because you’ve got nice profits built in. If mortgage rates continue to edge higher, then things are going slow down.

That’s it for the homebuilders. That’s it for BTNT today. I’ll catch you guys next week.

Cheers, everybody.