Three Housing Stocks Not Startled By Housing Starts - Analyst Blog

Wednesday's Housing Starts number came in at 880k, falling well below the 950k forecast and last month's 1048k reading. The weak reading put a damper on the trading day and helped the SP 500 close lower by 10 points. Ever since the Great Recession we have all been wondering when will housing finally come back.

I dug a little further into the data to shed some light on the situation. Looking month to month for me is looking too close. It's like choosing a stock based on the closing price of the last two trading days. When investigate stocks my charts always have a moving average to help determine trend. And if there has been a magnificent run or a precipitous drop I apply Fibonacci analysis. Let's pretend that Housing Starts data is a stock and get to work.

If this was a stock, I'd be buying it right here. The magical 25x5 SMA perfectly supports the data points along the way up. Starts peaked in January 2006 at 2273k. We dipped below the 25x5 in 2006 and dropped all the way down to 490k before the ride was over. We bounced along the bottom until finally popping back above the 25x5 in 2011. Last month's number, harsh as it was, is still well above the SMA and therefore still riding a bullish wave in a positive trend. Hurray Housing!

Now take the peak to the drop and draw in Fibonacci retracement levels. If this was a stock I would look for short term resistance at each of these levels as they were approached and look for these levels to provide support once breached. Housing starts approached 1171, hitting 1101, before pulling back just shy of 910 this month at 880. 30k in the grand scheme of things is a blink of an eye. I would be surprised if next month's number was significantly lower than 910.

Again, if Housing Start data was a stock, I'd be pounding the table with two fists on this one (assuming the Zacks Rank was #1 or #2). Looking at the longer term picture, housing starts have a tendency to stay on the bullish side of the 25x5 SMA for several years as it recovers. The last housing boom lasted the entire decade of the 90s and the first half of the 2000s. Extreme levels almost always hit 2000k, more than twice where we are now. At 880k we are near what historically was a low prior to the unusual activity of the last 8 years or so.

Now for the fun part. Let's find some stocks that will benefit from a continued recovery in housing starts. The most obvious sector is the home builders. With a Zacks Industry Rank in the top 11% you can expect to see a few Zacks Rank #1 (Strong Buy) stocks on the list.

William Lyon Homes ( WLH ) is a single family home builder in California, Arizona, Nevada and Colorado. Since going public in May 2013 the stock has bounced around from $20 to $29.50 where it is today. The Zacks Rank #1 (Strong Buy) rests on a single analyst that covers the stock so far. With earnings estimated to hit $2.27 per share this year and $3.45 next year the stock has been running up in anticipation.

The chart looks like a bottle rocket. This year alone the stock has risen from $22 to $30 without any major pull back. Stochastics are unsurprisingly overbought and the 25x5 is a distant memory down at $23.22. I know I'm supposed to be the guy that buys high and sells higher, but this stock seems a bit overdone for the time being. If it pulls back to $27 with a stochastic below 50 I'll take it but right now it's a little rich for my blood.

Another West Coast builder to look at is Taylor Morrison Home Corp ( TMHC ). This Zacks Rank #1 (Strong Buy) builds single-family homes in Florida and Texas in addition to Arizona, California and Colorado. Another relatively new issue, TMHC came public in 2013. Here the chart looks to be range bound which could present a great opportunity if it breaks out. Entrenched in a battle of the bulge from $20 to $24 since July, the stock could either turn south here on a failed breakout, or bust the range and go higher. Two ways to play it are wait for $20 and load up, or throw a GTC limit order at $24.50 and play the breakout.

Now for the big dog. D. R. Horton ( DHI ) is one of the largest homebuilders in the US. The company has a presence in just about every corner of the country and pulls a Zacks Rank #1 (Strong Buy). In the last 30 days eight analysts have revised their current year estimates to the upside, raising the consensus from $1.58 per share to $1.65.

The chart is easier to stomach than the other two. DHI sits above an upward sloping 25x5 SMA setting it firmly in an uptrend since mid-December. The stochastics are almost neutral, meaning another day or two we could be oversold and looking for a trigger to buy. The May 2013 high around $27.50 is probably a good price target and helps set your reward at 18% from today's close. Scooping some shares up at $23 with a stop loss tight at $21.50 gives you a 3:1 risk/reward ratio.

D R HORTON INC (DHI): Free Stock Analysis Report

TAYLOR MORRISON (TMHC): Free Stock Analysis Report

WILLIAM LYON HM (WLH): Get Free Report

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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.

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