Homebuilder Stocks Add Gains as Home Sales Rebound

Homebuilding stocks have received a much-needed boost this week after solid quarterly earnings reports from leading industry players and encouraging economic data showing an improvement in new home sales last month.

The U.S.Census Bureau and the Department of Housing and Urban Development released a monthly report showing that new home sales increased 7% in June to register a seasonally adjusted annual rate of 646,000 units for the month, representing 4.5% year-over-year growth. Although the number missed expectations by 10,000 units, it still represents a recovery from two consecutive months of decline and marks a significant improvement from the 604,000 May reading.

Market commentators attribute improving homebuilder sentiment and declining mortgage rates along with low unemployment for June's upbeat report. According to data from the Federal Home Loan Mortgage Corporation, familiarly known as Freddie Mac, the 30-year fixed mortgage rate has fallen to an average of 3.81% from nearly 5% in November, as reported by CNBC.

Traders who follow the sector should monitor these three large homebuilders that may see follow-through buying based on the underlying supportive macro environment and an uptick in investor sentiment. Let's review each company's second quarter (Q2) earnings and discuss possible trading tactics.

Lennar Corporation (LEN)

Miami-based Lennar Corporation (LEN) operates as a homebuilder primarily under the Lennar brand in the United States, targeting first-time, move-up, and active adult homebuyers. The company also provides mortgage financing and related services to its customers through its financial services segment. Lennar topped analysts Q2 earnings estimates by 15% and revenue projections by 8.8%, citing improved affordability and increased demand from declining interest rates for the solid results. The homebuilder's stock has a $15.02 billion market capitalization, issues a 0.34% dividend yield, and is up 22.30% year to date (YTD) as of July 26, 2019.

After setting a YTD high at $54.45 on May 16, Lennar shares have declined toward the 200-day simple moving average (SMA) and horizontal support line at $46. However, in Thursday's trading session, the stock price broke above a falling wedge pattern, an event that may trigger further buying in the days and weeks ahead. Also, a recent cross of the moving average convergence divergence (MACD) line above the signal line indicates further upside momentum. Those who take a long position should look for a retest of the May and June swing highs at the $54 level. Traders could place a stop order beneath either yesterday's low at $47.06 or just under the falling wedge pattern's lower trendline, depending on risk tolerance.

PulteGroup, Inc. (PHM)

PulteGroup, Inc. (PHM) engages in the homebuilding business, acquiring and developing land to construct homes. The Atlanta-based homebuilder offers a range of designs, including single-family detached, townhouses, condominiums, and duplexes under various brand names such as Pulte Homes and Del Webb. Like Lennar, the $8.74 billion company also offers mortgage financing to prospective homebuyers. PulteGroup posted Q2 earnings per share (EPS) of 86 cents, surpassing Street expectations of 82 cents per share. Revenue came in at $2.49 billion, exceeding estimates of $2.48 billion. The robust results prompted RBC Capital Markets to upgrade PulteGroup stock from "Underperform" to "Sector Perform." As of July 26, 2019, PulteGroup shares offer a 1.42% dividend yield and have returned nearly 20% on the year.

The homebuilder's share price traded sideways for the first three months of the year before trending over 13% higher between April and June. Despite the company's solid quarterly results, the stock price plunged 8.3% on the day it reported as investors fretted over a cautious downbeat full-year forecast. Since then, the stock has used a crucial level of support at $31 as a springboard, jumping more than 3% higher in Thursday trade. Those who buy here should anticipate a move to the January 2018 swing high at $34.48 while managing risk with a stop positioned somewhere beneath this month's low at $30.26.

M/I Homes, Inc. (MHO)

M/I Homes, Inc. (MHO) operates as a builder of single-family homes primarily across the Midwest, East Coast, and Southern regions of the United States. The Columbus, Ohio-based company targets entry-level, move-up, and luxury homebuyers. As well as providing homebuilding services, M/I Homes offers mortgage loans and title services. The homebuilding firm reported Q2 EPS of $1.08 to deliver a 25.58% earnings surprise. Revenues also surpassed consensus estimates by 17.34%, coming in at $623.69 million. It is the third consecutive quarter that the company has exceeded analysts' EPS forecasts. Trading at $33.19 with a market cap of $953.51 million, the stock has returned an impressive 57.90% YTD, outperforming the residential construction average by 26.79% over the same period as of July 26, 2019.

M/I Homes shares gapped up by about 9% on Wednesday, July 24, after its inspiring quarterly earnings. A breakout above a six-month ascending triangle on above-average volume may act as a catalyst for more bullish upside price action. Traders who take an entry should consider trailing a stop under the previous candle's low to ride momentum as far as possible. Alternatively, more conservative traders may decide to wait for a pullback and place a limit order near the initial breakout point at $30, which now acts as an important support area. Under this scenario, think about setting a stop-loss order below the 50-day SMA and targeting a move to resistance at the $34 level.