One Homebuilder That's Back

07/18/2012 8:15 am EST

Focus: STOCKS

Michael Cintolo

Vice President of Investments and Chief Analyst, Cabot Heritage Corporation

There are a few misperceptions about the current state of the housing market, and that works in smart investors' favor, writes Mike Cintolo of Cabot Top Ten Trader.

The homebuilding business is improving, and Lennar (LEN) is leading the way higher. As such, we are selecting the firm as our latest "Editor's Choice" stock.

We've consider the stock the top play in the homebuilding sector for a few months now, as it recovered to multi-year highs faster than its peers. The company is back to being one of the strongest stocks in the market, thanks to a terrific quarterly report. Sales and earnings both beat expectations, and management offered many encouraging words in its conference call.

Notably, despite persistent worries of a new down leg in housing prices because of huge "shadow" inventories, the reality is that consumers are beginning to fear missing out on the incredible affordability (low prices plus low interest rates).

In addition, inventories in many markets are extremely lean. Of course, the top brass was careful to point out that the recovery is regionalized, with some markets doing great and others still in the dumps.

Still, the overall trend is clear—its up. And analysts and institutional investors are beginning to come around to that fact. Analysts now see Lennar's earnings totaling 87 cents per share this year and $1.37 in 2012, and we think that could be very conservative if the economy picks up steam and interest rates remain low. As such, we like it.

Technically, LEN was the first homebuilder to hit multi-year highs, and it actually trended higher into early May, even as the market was sagging. It eventually succumbed to the pressure of the market. But the bigger picture shows a stock that ran from $12 to $30, and could only pull back to $23.50 before perking up again.

More recently, LEN burst to new highs following earnings on a big pickup in volume. While it won't be straight up from here, it's clear that the path of least resistance is up. We rate the stock a buy between on weakness to the $28.50 to $30.50 area.

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