The two charts below show both Lennar (LEN) and Toll Brothers (TOL) -- our two favorite homebuilders -- correcting off their January ’13 highs.
Monster Run
These stocks in particular, and the homebuilders in general as represented by the XHB, had a monster run from late 2011, through December, 2012, increasing more than 100%.
Lennar just reporetd earnings three weeks ago and although we know how strong the sector fundamentals remain, we choose to wait for a better valuation.
The recent jump in interest rates, starting in May was a good time for us to sell the great majority of our homebuilder stocks. The key tell was TOL’s earnings report, as the stock opened sharply higher, then sold off and closed at the lows during the day.
Fundamentals
Housing fundamentals remain very strong, although mortgage rates have started to rise. We never try and put hard and fast prices on where we might buy and sell, but LEN gets very interesting in the low $20′s while a good risk-reward entry point for TOL is closer to $25.
Of the two homebuilders, TOL has the better balance sheet, while LEN has the stronger forecasted earnings growth.
On The Way Down
The above sells were well timed. Be patient on the way down. The interest-rate trade may take a while to get 'risked-out' of the market.
We remain long names like Home Depot (HD) and Lowe’s (LOW) given their consumer spending ties, but sold out of our REIT’s too.
Brian Gilmartin, CFA Portfolio manager
Trinity Asset Management, Inc.
Monster Run
These stocks in particular, and the homebuilders in general as represented by the XHB, had a monster run from late 2011, through December, 2012, increasing more than 100%.
Lennar just reporetd earnings three weeks ago and although we know how strong the sector fundamentals remain, we choose to wait for a better valuation.
The recent jump in interest rates, starting in May was a good time for us to sell the great majority of our homebuilder stocks. The key tell was TOL’s earnings report, as the stock opened sharply higher, then sold off and closed at the lows during the day.
Fundamentals
Housing fundamentals remain very strong, although mortgage rates have started to rise. We never try and put hard and fast prices on where we might buy and sell, but LEN gets very interesting in the low $20′s while a good risk-reward entry point for TOL is closer to $25.
Of the two homebuilders, TOL has the better balance sheet, while LEN has the stronger forecasted earnings growth.
On The Way Down
The above sells were well timed. Be patient on the way down. The interest-rate trade may take a while to get 'risked-out' of the market.
We remain long names like Home Depot (HD) and Lowe’s (LOW) given their consumer spending ties, but sold out of our REIT’s too.
Brian Gilmartin, CFA Portfolio manager
Trinity Asset Management, Inc.