How To Play A Homebuilder Breakout
Confidence is returning to the housing market.
It’s not the same euphoria you witnessed in 2005 that prompted once-sane people to start bidding wars over unfinished McMansions. But homebuilders have clearly taken a step toward recovery. Big-name builders like Lennar Corp. (NYSE:LEN), PulteGroup Inc. (NYSE:PHM), and Toll Brothers Inc. (NYSE:TOL) have already shown investors huge gains so far this year.
Today, I’m going to show you a few different ways to play a strengthening housing sector—all without buying a single homebuilding stock.
But first, take a look at the S&P Homebuilders Index ETF (NYSE: XHB):
The homebuilder’s index took more than four months to digest its early 2012 rally. Now, you can see that homebuilder stocks are breaking out to fresh highs.
As you’ve probably already guessed, buying a builder is the most straightforward way for you to play this trend. After all, homebuilders are finally enjoying a good year after enduring more than six years of investors tearing them apart. Here’s an idea of just how bad it was for these companies (via Bloomberg):
Single-family starts hit a 50-year high of 1.8 million in January 2006 as home prices rose, then sank to a 50-year low by March 2009.
Obviously, it’s been an incredible roller coast ride for these stocks. And if you’re looking for a couple of backdoor plays on the homebuilder breakout, consider looking toward more consumer-oriented businesses. Sympathy plays could include furniture names, home security firms, and home improvement retailers. Home Depot Inc. (NYSE:HD) is an exceptional example of this final category:
Home Depot shares are currently breaking out to new 52-week highs, following up its strong early 2012 performance. Home Depot is one of the strongest stocks on the market right now. That’s no accident. In fact, I saw signs in late 2011 hinting that the stock was in position to become a new market leader.
Last December, I alerted you to a “changing of the guard” that was taking place in the market. I told you that top retail big-box stores Wal-Mart Stores Inc. (NYSE:WMT) and Home Depot were setting up to become market leaders in 2012. Their strong performance compared to the market at-large in early December tipped their hand. While most stocks were struggling to recover, Home Depot was topping its pre-correction highs. Right now, I’m seeing additional strength that could extend this incredible winning streak.
But before you buy any of the homebuilding plays I’ve mentioned today, here’s one final tip: plan your entry carefully! Many of these stocks (including Home Depot) have posted new highs within the past few days. You should never chase a breakout or attempt to buy an overextended stock.
Instead, let the market come to you. You should have plenty of opportunities in the coming days and weeks to buy names like these as they retest their breakout zones and bounce higher off support.
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