Markets & Finance

Stovall: Rising Hopes for Homebuilders?


The battered industry makes it onto the weekly momentum list, but S&P analysts have a neutral outlook on the group

From Standard & Poor's Equity ResearchI nearly fell off my chair when I was preparing this week's high-momentum list and saw that the S&P 1500 Homebuilding subindustry index had become a member. But it's true. As of Sept. 26, Homebuilding's trailing 52-week price performance was in the top 10% of all subindustries in the S&P Composite 1500 index (consisting of the S&P 500, MidCap 400 and SmallCap 600 indexes). In the past year, this subindustry eked out a 0.7% advance, as compared with the S&P 1500's decline of 19.8%. In fact, the Homebuilding group was only one of 13 subindustries to post 12-month price gains. The remaining 122 subindustries in the S&P 1500 declined, with Thrifts & Mortgage Companies being the worst performer, off more than 84%.

Relative Strength rankings are based on the trailing 52-week price performance for all sectors and subindustries in the S&P 1500. As seen in the accompanying chart, the jagged blue line represents the subindustry index's rolling 52-week price performance as compared with the 52-week performance for the S&P 1500. Any point above 100 indicates market out-performance over the prior year, while points below 100 indicate market underperformance. The red line is a rolling 39-week moving average, while the two green bands indicate one standard deviation above and below the index's long-term mean relative strength.

The Homebuilders index broke above its moving 39-week average in March 2008 and successfully retested the average in July. Since then it has soared, maybe too swiftly for my liking. But what say our analysts?

Buys and Sells

S&P Equity Analysts cover 12 large-, mid- and small-cap stocks in the S&P 1500 Homebuilding subindustry. Three carry 4 STARS (buy) recommendations: D.R. Horton (DHI), M.D.C. Holdings (MDC), and Toll Brothers (TOL), while three have 2 STARS (sell) rankings: Hovnanian Enterprises (HOV), KB Home (KBH), and Ryland Group (RYL).

S&P has a neutral fundamental outlook for the homebuilding group. For the first half of 2009, S&P looks for most public homebuilders to begin to stabilize their businesses with the prospects of reduced order cancellations and asset write-offs, as well as positive order demand and home deliveries. Proposed federal legislation may provide a windfall in tax refunds to the depressed industry.

Market stability may happen by mid-2009, in S&P's view, as it forecasts home prices to decline 30% from peak to trough for the U.S. housing market, and above 40% in major markets with high levels of defaults and foreclosures. A more positive view of the industry is dependent on the housing market's ability to reduce inventory, which stands at 11 months compared with a six-month average in healthier housing markets. In S&P's opinion, home inventories may begin to decline when the pace and level of foreclosed homes eases. Normalized levels of six months may not occur until 2010, in S&P's view.

To date, S&P believes the key factors driving the housing downturn are a decline in buyers' confidence, credit tightening by lenders, an oversupply of homes available for sale, and the inability of many home buyers to sell their current homes. S&P believes homebuilders have strengthened their balance sheets by reducing debt and boosting cash to endure the current housing downturn. Since the 2006, the top 13 public homebuilders have written off more than $25.4 billion in land inventory, land options, goodwill, and investments in joint ventures.

With July housing starts down 29.6% and permits off 32.4% vs. a year ago, S&P thinks equilibrium between supply and demand in the market may not be realized until 2010. Although S&P expects that the present cyclical downturn should be more manageable for large builders than past declines, its outlook remains very cautious, especially regarding smaller, less geographically diverse builders and relatively highly leveraged operators. S&P sees an easing in the rate of decline in order cancellations, net contracts, backlog, and asset write-offs, which informs its outlook on the subindustry.

So, there you have it. S&P remains neutral on the homebuilders group, despite the improved relative performance.

Industry Momentum List Update

Here is this week's list of the industries in the S&P 1500 with Relative Strength Rankings of "5" (12-month price performances that were among the top 10% of the industries in the S&P 1500), along with a stock that has the highest S&P STARS (tie goes to the issue with the largest market value).

Subindustry Company Ticker S&P STARS Rank Price (9/26/08)

Biotechnology Genzyme GENZ 5 $76

Brewers Molson Coors TAP 4 $46

Building Products Masco Corp. MAS 3 $19

Coal & Consumable Fuels Peabody Energy BTU 4 $49

Fertilizers & Agr. Chem. Monsanto MON 5 $106

Health Care Equipment Becton, Dickinson BDX 5 $82

Home Furnishings Leggett & Platt LEG 3 $22

Homebuilding D.R. Horton DHI 4 $14

HyperMarkets & Super Centers Wal-Mart WMT 4 $61

Insurance Brokers Aon Corp. AOC 4 $47

Oil & Gas E&P Swift Energy SFY 5 $42

Personal Products Avon Products AVP 3 $42

Railroads Norfolk Southern NSC 4 $70

Tobacco Altria Group MO 5 $21

Source: Standard & Poor's Equity Research


Monsanto vs. GMO Haters
LIMITED-TIME OFFER SUBSCRIBE NOW

(enter your email)
(enter up to 5 email addresses, separated by commas)

Max 250 characters

Sponsored Financial Commentaries

Sponsored Links

Buy a link now!

 
blog comments powered by Disqus