Build Up Your Portfolio With Some Shares of KB Homes

KB Homes (NYSE:KBH) stock is trying to recover after dipping hard in after-hours trading following the company’s earnings report. The report itself was mixed. Earnings per share came in 10 cents above analysts’ estimates ($1.02 vs. 92 cents). However revenue came in slightly below estimates ($1.14 billion versus the $1.20 billion expected).

Perhaps investors were expecting more. Or perhaps with the KBH stock price climbing 25% since its last earnings report in November, investors thought this was a good time to take some profit. Whatever their motivation, I expect KBH stock to find some support and get ready to move to new highs in 2021. In this article, I'll give you a couple of reasons to support that belief. 

The Home Buying Surge Is Not Over

We are just over one year into this pandemic. Last year at this time, when we knew a lot less about the novel coronavirus, homeowners and prospective buyers were taking stock of their situation. It’s not surprising that companies such as Home Depot (NYSE:HD), Lowe’s (NYSE:LOW) and Wayfair (NYSE:W) were winners during the pandemic. Home offices had to be built. Open floor plans no longer seemed to fit.

But other homeowners simply decided to punt. With interest rates (and mortgage rates) at record lows, a home buying spree began. And for many homebuyers building a home that met their expectations was preferable to buying an existing home. Plus, there simply wasn’t the supply of homes to meet demand.

KB Homes specialize in a Built-to-Order model that fits the desires of these homebuyers.

More Catalysts Leave Room For Optimism

Some investors may have been disappointed by the company’s mixed earnings. But that seems to be a case of elevated expectations. There are many catalysts for KBH stock. To begin with, the Federal Reserve has said it will keep interest rates low for as long as it takes. This means that mortgage rates will remain favorable for home buyers.

Plus, the morning after the company released its earnings Jobless claims came in at their lowest level in over a month. Construction jobs are still trying to reach pre-pandemic levels. And this could be an indication that they are headed in the right direction.

And the fourth-quarter GDP was revised upwards. All this good news as vaccinations continue to roll out will lead to an increase in consumer confidence. Which makes it all the more likely that KB Homes will see higher revenue and earnings in 2021.

Not everything is rosy for KB Homes. Lumber prices remain high and are likely to stay that way for some time. But so far this appears to be a cost that consumers are willing to bear.

What is the KBH Chart Saying?

Prior to the release of its earnings, KBH stock was forming a rising wedge pattern of higher highs and higher lows that were narrowing in on each other. The stock now looks to be stuck in a range, but this is likely just a temporary setup for the next leg up.

KBH stock was trading above the consensus price target of analysts. However, in the last month the stock has received several price targets above the average. As analysts have time to digest the company’s recent earnings report, it’s likely that the stock will receive more price upgrades which could provide support for a bigger upwards move.

Use This Dip as a Buying Opportunity

The period between December and February has historically been one of the company’s lightest quarters in terms of revenue. So the miss is not really a big deal, particularly since it was still 6% higher than the same quarter in 2019. Keep in mind that was before the pandemic.

Opportunistic investors should use this dip as an opportunity to pick up KBH stock at a nice discount. Even the stock takes a little time to push back above where it was in mid-March, you can collect a dividend that is well supported by the company’s earnings.