4 Homebuilders Emerging from the Rubble

01/19/2012 8:15 am EST

Focus: STOCKS

Michael Cintolo

Vice President of Investments and Chief Analyst, Cabot Heritage Corporation

There have been some specifically unloved sectors in the past number of years, but this one looks like it might be strengthening its pulse, writes Mike Cintolo of Cabot Market Letter.

For the past five years, no sector has performed as poorly as the housing group. But could a bull market be brewing in the sector?

We think it’s fair to say that no sector (except for possibly the financials) is as despised as housing-related stocks. And for good reason—they’ve truly been the dog’s dinner.

 So why are we writing about housing stocks? Because, slowly but surely, we’re seeing signs that the sector has turned the corner.

Don’t get us wrong—we’re not calling for a new housing bubble or even a major boom. But based on the fundamentals, even a little improvement would result in huge growth. Combined with the massive cutbacks by housing-related firms, any sizable pick-up in demand would fall right to the bottom line.

And we’re seeing actual signs of improvement—during the last four months, year-over-year housing starts were up 10%, down 5%, up 8%, and up a big 21% in the most recently reported month. September saw the largest number of housing starts (658,000) in 17 months.

And perhaps most important, individual homebuilders are beginning to talk encouragingly, with cancellations down, prices up, and stable-to-growing backlogs during the last quarter or two.

Last but not least are the charts, and we’ve been impressed with the powerful rebounds seen in many names since the October bottom, and on big volume to boot.

We like what we’re seeing in the charts of homebuilders like Toll Brothers (TOL), Lennar (LEN), and DR Horton (DHI)—not just their multi-week upmoves but, more impressively, the big volume and other signs of major accumulation.

Lennar, for instance, recently notched seven up weeks in a row—the first time it’s accomplished that feat since 2004.

Even Home Depot (HD) has seen its stock hit five-and-a-half year highs in recent weeks on big volume, while its RP line surges.

Now, turnaround-type stocks will never be the core of our Model Portfolio. But we think that after a six-year meltdown, housing stocks could be coming back into favor. It’s something to watch in 2012.

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