Homebuilding stocks ‘are not as strong as they once were,’ but these derivative names could still see gains, trader says


Homebuilding stocks could be losing steam.

Though the group outperformed in 2020, with the SPDR S&P Homebuilders ETF (XHB) and the iShares U.S. Home Construction ETF (ITB) both beating the S&P 500 by about 10 percentage points, pure-play homebuilding stocks are faltering, JC O’Hara, chief market technician at MKM Partners, told CNBC’s “Trading Nation” on Tuesday.

“They’re not as strong as they once were,” O’Hara said.

“These were some of the best charts coming out of the March low, but ever since August, those trends have kind of moved sideways,” he said. “If you look at the performance of a bunch of these homebuilders, they’re basically flat since August while the overall market’s up 10%.”

Bank of America Securities put out a note Tuesday maintaining D.R. Horton as its top homebuilding stock pick for 2021 given its scale and focus on first-time buyers. The firm also downgraded PulteGroup to underperform from neutral due to what analysts called its more “discretionary” product.

O’Hara wasn’t negative on the space as a whole.

“Just because the homebuilders are losing trend and are not attractive from a technical perspective, I still really like housing stocks,” he said, pointing to a chart of the pure plays — represented by the S&P 1500 Homebuilders Index — versus the XHB.

“This is a housing ETF with a diverse group of names, from homebuilders to home improvement stocks to furniture companies,” he said of the XHB. “We could see recently the basket of housing stocks has really started to outperform the builders.”

O’Hara highlighted the charts of flooring company Floor & Decor, mattress maker Tempur Sealy and decking manufacturer Trex, all of which he said look set to break out.

“I believe overall, housing is still a great theme for 2021, but I would just rather play that theme through housing stocks, not necessarily the pure homebuilders,” he said.

Mark Tepper, president and CEO of Strategic Wealth Partners, agreed with Bank of America’s calls.

“D.R. Horton is my favorite homebuilder, so, I like the overweight D.R. Horton, the underweight Pulte concept,” he said in the same “Trading Nation” interview, adding that D.R. Horton’s entry-level offerings feed into three key trends driving the housing market.

“You’ve got the geographical trend, which is people moving from cities to suburbs, you’ve got the generational trend, which is the millennials buying their first homes, and then you’ve got the work-from-home trend. People are spending more and more time at home, so they want their homes to be nicer, bigger and newer,” Tepper said.

PulteGroup’s focus on the “move-up category” puts it at a disadvantage, as does D.R. Horton’s land-buying strategy, which keeps the company asset-light by using options to purchase land rather than buying it directly, he said.

Several derivative housing plays also have a lot of potential, Tepper added.

“We own Mohawk. So, Mohawk is the world’s largest flooring manufacturer, and it’s really like a catch-up trade on housing,” he said, noting that it only climbed about 3% in 2020. “They had this lawsuit overhang which was a drag on the stock. That’s fully priced in. That’s old news. So, I think you have the opportunity for some catch-up there.”

Tepper also flagged the stock of Quicken Loans parent Rocket Cos., which went public in early August.

“It is the biggest pure-play mortgage lender and Rocket has the best technology,” he said. “It’s kind of a fintech way of playing the housing boom. It’s the easiest, most frictionless way for a consumer to get a mortgage, and as long as interest rates stay low, there’s going to be a lot of demand for new mortgages.”

Disclosure: Tepper owns shares of D.R. Horton and Mohawk.


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