I 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.