The Home Builders Are A Buy, Buy, Buy

The Unseen Consequences Of COVID-19

The COVID-19 pandemic struck fast and furiously, it shut down our economy, forced us to live apart from others, and retreat into the isolated world of “home”. During this time a number of trends have emerged, trend that are already producing profits for investors, and today’s news highlights another. People don’t want to live in the city quite as badly as they used to. The pandemic, the risk of infection, the severity of lockdowns, are all enhanced by close urban lifestyles and that fact is pushing people to the suburbs.

In Lennar’s (LEN) fiscal Q2/calendar Q1 earnings report they cite that very fact. Executive Chairman Stuart Miller said "Customers moved from rental apartments and from densely populated areas to purchase homes,” and the low-interest rates/low inventory environment helped drive the rebound.

Lennar Prepares For Housing Rebound

Lennar is a full-service homebuilder operating across much of the continental U.S. The company exceeded expectations in the first quarter for both revenue and earnings as demand underpinned business despite the lockdowns. Revenue fell slightly from the year-ago period, no surprise there, but EPS came in strong and well above last year’s levels.

In terms of deliveries and new orders, deliveries held steady to the previous year while new orders fell -10%. The takeaway for investors is that, while down, new orders came in well above the analyst’s consensus and are building on strength from earlier in the year. The strength in new orders contributed to an increase in backlogged orders that points to sustained business strength in 2020.

Looking forward, the company says a rebound is already underway that began in May and accelerated into June. In terms of new orders and deliveries, new orders are expected to reach their pre-COVID levels as soon as next quarter with deliveries accelerating into the end of the year at least. Demand is so high, in fact, the company is increasing its land-spend and housing-starts to keep up with the market.

The Entire Home-builder Sector Is On The Move

The news from Lennar has not only shares of LEN on the move but those for most other publicly traded homebuilders. Hovnanian (HOV), Toll Brothers (TOL) and Beazer (BZH) are up anywhere from 0.4% to 1.4% in early trading while the Homebuilders SPDR (XHB) is up a robust 4.5%. While I don’t typically prefer the ETFs over individual stocks in this case I can make an exception because no single stock in the group stands out as a great dividend payer.

The highest yield among the homebuilder is sub-1.5% and the XHB pays a better-than-average 1.0% so there is really no need to take on the single-stock risk. In addition, the payout has a tendency to increase over the long-term(year to year) despite the erratic quality to quarterly distributions.

On a technical basis, the XHB is slightly underperforming shares of Lennar but only slightly. Looking past that, the chart of XHB looks bullish post-pandemic with the price action set to move higher in the near and short terms. In the bulls favor? Monday’s price action confirmed support at the short-term moving average and today’s news has it moving even higher.

Today’s open has the ETF trading above resistance at the $44.50 level but just shy of the recent high. The indicators are still mixed so resistance may hold prices in check, that said the indicators are also set upu to fire bullish trend following signals in tandem with upward price action. A move above the recent high, near $46.50, would be very bullish.

There Is A Catalyst At Hand

The results from Lennar are foreshadowing a catalyst that could very easily lift the homebuilders into year’s end: the May housing data. The May housing data is due out on Wednesday and expected to show a sharp rebound from the previous month. The analysts are expecting permits and starts to rebound as much as 20-30% from the previous month and accelerate into the end of the year.

A stronger than expected number is not out of the question, the Retail Sales figures just put the analysts to shame, if we get one I expect the homebuilders will surge. And if we don’t? The home builders are still a buy because this is shaping up to be one great year for building houses.