Homebuilder stocks soar as sector outpaces the market

Key Points

• Homebuilder stocks are rising significantly as the sector outperforms the market.
• Sector leaders like PulteGroup and Toll Brothers notably showcase robust performance amid the surge.
• The SPDR S&P Homebuilders ETF has surged over 36% year-to-date, outpacing the overall market in the same period.

Few sectors have impressed as significantly as the homebuilder sector in recent weeks. The SPDR S&P Homebuilders ETF NYSE: XHB has risen over 16% over the last month. That performance is enough to outpace the overall market, which has risen 7%, and the technology sector, which has risen 12% in the same period. 

Remarkably, two industry-leading names within the sector have staged an impressive rally within that timeframe and achieved new 52-week highs. Moves occurred after both stocks traded near their 200-day simple moving average (SMA) just one month ago.

Given the recent outperformance of the sector and attractive technical charts of heavyweight companies within it, it's certainly worth taking a closer look at the sector.

Two stocks that have caught the eye over the previous month for their relative strength and favorable chart setup are PulteGroup Inc. NYSE: PHM and Toll Brothers Inc. NYSE: TOL. But before analyzing those two names further, let's first look at the popular sector ETF, the XHB.

Homebuilder sector ETF XHB outpaces the market 

The XHB ETF has outpaced the market in recent weeks and year-to-date (YTD), now up just over 36%. But for those unfamiliar with this ETF and investment vehicle, what exactly is the XHB?

The SPDR S&P Homebuilders ETF (XHB) strives to mirror the S&P Homebuilders Select Industry Index, focusing on the homebuilding sector within the broader S&P Total Markets Index. 

Its portfolio exhibits an 85.3% geographic exposure to the United States and a substantial 40.5% industry exposure to household durables. With an attractive 0.78% dividend yield, managing $1.36 billion in assets and maintaining a modest net expense ratio of 0.35%, XHB has long stood as a prominent investment option. 

The ETF includes Toll Brothers as the 17th largest holding with a 3.62% weighting and PulteGroup ranking as the seventh-largest holding, carrying a 3.93% weighting. Both stocks have displayed impressive relative strength recently. 

Two homebuilders outshine the rest

PulteGroup specializes in land acquisition and development for residential purposes. Additionally, PulteGroup facilitates financing through mortgage loan origination for homebuyers, selling servicing rights for these loans and providing various title insurance policies, examinations, and closing services to its clientele. 

In its most recent earnings report on October 24, the construction firm surpassed analyst expectations, reporting $2.90 EPS for the quarter, exceeding estimates by seven cents. Despite revenue slightly below analyst predictions at $4 billion compared to the estimated $4.05 billion, the quarterly revenue showed a 2.8% increase from last year's quarter.

PHM shares surged by nearly 27% in the last month. Technically, the stock exhibits a potential upward trajectory. Consolidating near its 52-week highs within a narrow range, PHM may see a continuation of upside momentum if it can break out above the short-term resistance near $89.

Toll Brothers specializes in developing, constructing and financing residential and commercial properties. The company maintains a robust financial position, evident in its prudent debt-to-equity ratio, showcasing responsible management of financial commitments. 

Trading at a low P/E ratio of 6.2, the company falls into the value investment category and offers a modest dividend yield of 0.97%. Analysts have given the stock a "moderate buy" rating, reflecting positive sentiment. 

In the last month alone, the stock has surged by over 25% and is consolidating above the rising five-day simple moving average (SMA) within a narrow range of $85 to $87. A breakthrough above $87 could trigger further upward momentum for the stock and the entire sector.