3 Homebuilder Stocks on Edge: Will the Sector Hold Its Ground?

July 02, 2024 at 07:00 AM EDT

PulteGroup logo stock market on smartphone screen

The homebuilders industry and construction stocks have been in the spotlight recently, and the XHB SPDR S&P Homebuilders ETF (NYSE: XHB) is currently at a pivotal support level. As the ETF hovers near this critical point, investors might be questioning whether the sector can sustain its momentum or if a significant pullback is imminent. Adding to concerns, a recent earnings beat by one of its major players failed to lift its stock price, suggesting that momentum and the ability to regain higher ground might be dwindling.

Can the Homebuilders Sector Hold its Ground?

The XHB ETF seeks to closely match the returns and characteristics of the S&P Homebuilders Select Industry Index, representing the homebuilding sub-industry portion of the S&P Total Markets Index. The sector has lagged behind the overall market yearly, posting a modest 5.6% gain. Typically, the sector performs well during periods of low interest rates and strong economic growth, which boost demand for new homes.

From a technical analysis perspective, investors are on the edge of their seats as the sector flirts with significant support after making consecutive lower highs on the daily chart. The crucial support level for the XHB ETF is $100. If the ETF breaks this level, the next support is at $95, indicating a potential 5% pullback if the $100 level is breached. This support level has held firm for several months, making it a significant area of interest going forward. Investors should closely monitor these sector heavyweights when considering investing in the XHB ETF.

PulteGroup’s Analyst Ratings and Market Position Ahead of Earnings

Through its subsidiaries, PulteGroup (NYSE: PHM) primarily engages in the homebuilding business in the United States. Like the overall sector and ETF, PHM is trading near its central support zone of $110, with short-term momentum to the downside. Analysts are bullish, with a moderate buy rating, but the company's upcoming earnings on July 23 are crucial and could change the narrative.

Previously, PHM topped estimates impressively, posting a $0.51 EPS beat and a significant revenue beat. However, even impressive earnings might not be enough to change the direction and sentiment of the industry, as was recently the case with its competitor, Lennar Corp.

Lennar Corp's Earnings Beat: Yet Stock Struggles to Gain Momentum

Lennar Corp. (NYSE: LEN) recently reported its earnings. The company, operating primarily under the Lennar brand, reported second-quarter earnings of $3.45 per share on approximately $8.8 billion in revenue, beating estimates of $3.23 per share on about $8.5 billion. Despite this beat, the stock failed to gain momentum, closing the month down almost 3% and trading near its significant support and breakdown area of $150—a worrying sign for the sector.

Toll Brothers' Relative Outperformance: Analyst Insights

Toll Brothers (NYSE: TOL) is a prominent homebuilder based in Fort Washington, Pennsylvania. It specializes in designing, building, marketing, selling, and arranging financing for residential and commercial properties. The company, set to report earnings on August 27, is currently trending below its 50- and 20-day SMAs, facing similar momentum challenges as the other two stocks. If TOL breaks below last week's low, a higher timeframe breakdown might be confirmed, potentially leading the stock toward its rising 200-day SMA near $100.

Year-to-date, TOL has performed well, with a 12% gain and impressive relative outperformance of the sector. Relative to its competitors, analysts are more bullish on TOL, with a consensus price target forecasting over 12% upside for the homebuilder.

XHB ETF and Key Homebuilders: What to Watch Next

The homebuilder sector, represented by the XHB ETF, shows signs of a potential pullback as it hovers near critical support levels. The performance of key stocks like PulteGroup, Lennar Corp., and Toll Brothers will be crucial in determining the sector's direction. Investors should closely watch these support levels and upcoming earnings reports to gauge the sector's next move.

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