Homebuilder ETFs Soar On Lennar Q1 Profit Beat

A generic image of a monitor with Market Analysis displayed Credit: Shutterstock photo

Homebuilder ETFs provided the foundation for Wednesday's stock market rebound afterLennar 's ( LEN ) first-quarter profit beat Wall Street forecasts.

Thanks to rock-bottom interest rates and towering rents, new permits for home construction climbed to their highest level since 2008. But they're still a far cry from normal levels and the bubble-era high, presenting plenty of room for improvement.

IShares Dow Jones U.S. Home Construction ( ITB ) climbed 2.91% to 24.71 -- the highest price in more than five years. Among all stock ETFs, it carries the highest IBD Relative Strength and Accumulation/Distribution Ratings of 89 and B. That shows it's outpaced 89% of the market in the past 12 months and institutional investors are heavily buying shares with very little selling. Yet it's only halfway to regaining its 2007 apex.

SPDR S&P Homebuilders ( XHB ) jumped 2.42% to 30.52. Aside from homebuilders, it includes home furnishing retailers such asPier 1 Imports ( PIR ),Bed Bath & Beyond ( BBBY ) andSelect Comfort (SCSS).

Lennar -- the third-largest U.S. homebuilder and a major holding in all three ETFs -- vaulted 5% to 43.41, its highest level in nearly six years. It broke out of a two-month long cup base with a 43.32 buy point in double average volume. Q1 earnings and sales jumped. ( See story .) Orders sprang 34% from the year-ago period.

JPMorgan analysts maintained their overweight rating noting that shares do not fully reflect the company's long-term earnings potential. S&P Capital IQ rated shares a hold, contending they trade high above historical averages although in line with peers.

Homebuilding Forecasts

February's single-family housing starts, reported Tuesday, ticked up 0.5% over January and an eye-popping 31.5% from the year-ago month to 618,000 units annualized. They've rebounded 75% from their historic low but are still 46% below normal levels, suggesting significant upside potential for the recovery, according to Credit Suisse.

Credit Suisse analysts forecast total 2013 housing starts to climb 20% year over year to 935,000 units. They expect a 19% increase next year to 1,115,000 units, which would still be 53% below the peak.

February housing permits added 2.7% over the prior month and 25.5% year over year to 600,000. They've advanced for 11 months in a row and remain 67% below their September 2005 high.

Inventories Down

Meanwhile, existing home inventories in January fell 25.12% year over year and for a fifth straight month to their lowest level since December 1999, according to Gilford Securities.

In most key markets, "the supply of existing inventory is at or below six months, a historically sweet spot for new home demand and pricing power," Jeremy Pichot, an analyst with Gilford, wrote in a research report Monday. "Homebuilders are in the beginning of a multiyear up cycle with significant earnings leverage and book-value growth that will make current valuations seem reasonable."

KB Home (KBH) is on deck to release first-quarter results before the market opens Thursday. Credit Suisse expects Q1 orders to surge 33% year over year, which is conservative after KB said orders vaulted 54% year over year through Jan. 18. Its stock rose 3% to 21.57 Wednesday.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

More Related Articles

Sign up for Smart Investing to get the latest news, strategies and tips to help you invest smarter.