Target This Homebuilding Stock Now

PulteGroup is one of the best stocks to own the next six months

Managing Editor
Nov 4, 2021 at 11:34 AM
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Last month, U.S. homebuilding unexpectedly took a breather, as housing starts fell 1.6% in September. Demand remains robust, but between worker and material shortages wrought by supply chain woes, homebuilding stocks are now at a crossroads as mixed data rolls in. The spiking lumber and copper prices is emblematic of the struggles for homebuilding companies, and the days of March – where housing starts were at a 14.5-year high – are firmly in the rear-view mirror. Yet at the same time, homebuilder confidence rose 4 points to a reading of 80 in October, from September’s reading of 76, according to the National Association of Home Builders/Wells Fargo Housing Market Index (NAHB).

It certainly piques our contrarian interest when surging demand faces off with labor and materials shortages. Consider this quote from the NAHB blog: "Building material price increases and bottlenecks persist and interest rates are expected to rise in coming months as the Fed begins to taper its purchase of U.S. Treasuries and mortgage-backed debt." So, have investors missed the train on a 2021 darling, or does the uncertain road ahead present an intriguing buying opportunity for homebuilding stocks?

Perhaps the hand should hover over the panic button but hitting it would be premature. Homebuilding exchange-traded fund (ETF) the iShares U.S. Home Construction ETF (ITB) typically tends to outperform in November, per Schaeffer's Senior Quantitative Analyst Rocky White. Per White's data, looking back at the last 10 years, ITB has averaged a November return of roughly 5%, with nine of the 10 returns positive. That's good for fifth-best among the ETF's tracked. Year-to-date, ITB has outpaced the S&P 500 with a 30% lead and the $66 level emerging as a floor during the last six months of choppy trading. Looking at White's data in December, ITB averages a paltry 0.1% gain, with only half of the returns positive.

Best ETFs November

ITB Chart COTW

 

If November is the time to strike before homebuilding stocks encounter headwinds, which individual equities should be targeted? PulteGroup, Inc (NYSE:PHM) stands out for appearing on not one but two internal seasonal metrics. For starters, PHM is one of the better stocks to own in November in the last decade, per its 7.1% average return and 90% positive rate that sits in the top 10 of the 25 S&P 500 stocks tracked.

Extending the data range out further shows that the next six months are quite profitable for PHM as well. As seen in our Indicator of the Week, White profiled the 25 best SPX stocks to own from November through April, a historically bullish period. PHM boasts an average return of 19.4% during this time frame since 2010, with nine out of 10 returns ending in the black. Moves of similar magnitude mean PHM could make another run at its May 10 record high of $63.90. And as a reminder, ITB is the ETF with the most PHM exposure at the moment, per etf.com.

Whether taking a flyer on PHM or playing it safe with ITB, implied volatilities (IV) of both are at comfortable levels for options traders. Their Schaeffer's Volatility Index (SVI) , and average at-the-money (ATM) implied volatility of a stock's front-month options, come in at 29%, and 21%, respectively, all ranking below the 10th percentile of their respective annual ranges. This underscores an attractive buying opportunity for both equity and ETF-- regardless of what the seasonal and macro trends could be hinting at.

Best Stocks November COTW

Subscribers to Chart of the Week received this commentary on Sunday, October 31.

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