foxex: Home Sweet Home

Wednesday, November 13, 2019

Home Sweet Home

Chart Advisor | Focus on the Price

By Gordon Scott, CMT

Wednesday, November 13, 2019

1. Interest Rates Drop Slightly but Still Favor Home Buyers and Builders

2. Homebuilder Stocks Maintain Lead over Market Averages

3. D.R. Horton Still Beating Expectations

Market Moves

The 10-year Treasury Note Index (TNX) fell slightly in today's trading session. This is good news for prospective home buyers and home builders alike because lower rates increase purchasing power and make homes more affordable. While some indications suggest that interest rates may rise, perhaps interest rates won't matter so much since they are near historic lows anyway. After all, the home building industry may be entering what is thought to be the best season of the year for those companies' stocks.

While the S&P 500 (SPX), the Nasdaq 100 (NDX), and the Dow Jones Industrial Average (DJX) were little changed for the day, bond prices moved higher by .65% (corresponding to the drop in interest rates). So far this year the Homebuilding industry has benefited from the downward trend in rates this year. The chart below shows that the industry has significantly outperformed the S&P 500 for the year so far. Stocks in the industry group are up over 50 percent on average.

Homebuilder Stocks Maintain Lead over Market Averages

Shares for homebuilder Meritage Homes Corporation (MTH) have already doubled their price so far this year. They represent the highest performance from the six largest holdings in the State Street's SPDR S&P Homebuilders ETF (XHB). The other five stocks include KB Home (KBH), D.R. Horton (DHI), Pulte Home (PHM), Lennar (LEN), and Toll Brothers (TOL). Five companies in this group have surpassed earnings expectations in their recent quarter reports. The remaining one, Toll Brothers, is scheduled to report earnings December 9.

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D.R. Horton Still Beating Expectations

Shares of D.R. Horton (DHI) jumped yesterday and maintained their position in today's trading. D.R. Horton is the largest company, by market capitalization, and beat analyst expectations in their last earnings reports, sending the stock to new all-time highs. This company managed to increase sales, increase profit, and hold expenses even while returning an industry-group best of 17% return on equity. If the biggest company in this space is capable of increasing all its metrics, then it is likely that other companies in the space still have room to grow as well.

The Bottom Line

For the twenty-first day in a row, the S&P 500 traded within a below-average sized range. This long streak of decreasing volatility puts the stock market in such a state, that the change in interest rates and bond markets is larger by comparison, even as the 10-year note fell slightly today. Low interest rates have helped homebuilder stocks gain anywhere from fifty to one hundred percent on the year. Even the biggest company in the group, D.R. Horton managed to improve all of its metrics this year.