Select Housing Stocks May Be Poised to Outperform Broad Market in 2011

Anecdotal evidence points to a rebound in the jobs mkt going into yr end and 2011. This will benefit payroll data processing companies like (RHI) and (MAN). This will steepen the yield curve and benefit select financials like GS and MS. This will benefit consumer spending and benefit credit card companies such as (AXP). Additionally, if job growth is seen, we can anticipate the month's supply of existing and new home sales will shrink as demand improves. Mortgage applications for new purchases clearly bottomed in the summer of 2010 and have been trending higher since. From Moody's Nov 26 summary of mortgage applications: “purchase applications finally turned a corner, rising above the 200 level last week for the first time in six months. Further, the purchase index was able to add to these gains this week, suggesting that the post-tax credit hangover is ebbing…the pace of purchase applications will pick up [and] the pace of growth will accelerate in mid-2011, once the national recovery hastens, reinvigorating job and income growth—the two main drivers of home sales.” The built in assumption is that the job mkt will improve, which it should given the record after tax profits of US corporations according to the St Louis Fed. With a positive shift in the demand curve for new and existing homes going into 2011, some homebuilders positioned in the right markets should benefit. While I am not an expert on which homebuilders are positioned to benefit from a rebound in demand, analysts are forecasting Lennar LEN will grow earnings from 34 cents in 2010 to 61 cents in 2011. DR Horton DHI is forecasted to grow earnings from 32 cents in FY 2011 ending Sept 11 to $1.00 in the FY 2012 ending Sept 12. Toll Brothers is set for an earnings turnaround from -38 cents in Oct 10 to 15 cents in the FY ending Oct 12. Likewise, Pulte PHM is poised for an earnings turnaround from -1.99 in the FY ending Dec 10 to +.13 in the FY ending Dec 11. If we take a composite of the two homebuilder stocks with positive a positive earnings trend in 2010 and positive expectations for 2011 (DHI+LEN) we find that the recent floor near 23 equates to the 1998 high and the Sept 2001 lows when Greenspan was en route to cutting rates to 1%. The weekly composite trend is best defined by the 18 month and 5 yr averages. Price at 26.50 is sitting on its 18 month blue average and the 5 yr red average is sloping into 40-41. There is considerable room for this homebuilder composite to provide some beta to the portfolio will all trading above 23 in the next 12-18 months. The SP500 is up 2% today. LEN is up 4%, and DHI is up 6% today. Clearly, these are high beta homebuilders that should outperform the broad mkt if the jobs mkt rebounds as well it should three years after the recession began. Seasonally, there is a central tendency for LEN and DHI as a composite to outperform the SP500 from late November until April-May. It looks like this seasonal pattern is poised to repeat off the Nov 30 low on the LEN+DHI composite / SP500 relative price strength chart for the 4th yr in a row and 7th time since 2001.