Summary
- Lennar has been one of the biggest winners this year after soaring almost 30% year to date.
- The stock was supported by a lot of hope after most homebuilders mentioned improving housing momentum.
- Despite easily beating EPS expectations, strong new orders and rising margins, the company's stock was down big after earnings.
- As I mentioned before, the fact that homebuilders have run into resistance warrants a "stay on the sidelines" strategy for now.
I have said it before: housing stocks are in a very complicated situation. Lennar's (LEN) just-released earnings confirm this statement. Even though the company reported another quarter of negative earnings growth and weakening sales growth, the stock is up after earnings after Lennar once again mentioned rising market fundamentals in the housing segment. Unfortunately, the company's comments did not turn out to be correct in the second quarter, as leading housing indicators are still down. It needs to be seen if the current comments are able to push the stock higher after going sideways since the start of April 2019.
Source: Lennar Corp.
What To Focus On
Without further ado, let's start by once again looking at a part of my previous conclusion with regard to Lennar stock:
The safest bet is to stay on the sidelines until we see that housing indicators are indeed recovering. I am afraid that traders are ignoring that building permits and new orders might continue to show weakness in the second quarter and maybe even beyond. (Article)
Housing stocks have been in a very tricky situation. They ended 2018 very weak but recovered more than 25% year to date on average. At the start of this year, I made the mistake of ignoring that potential too early. I was too much focused on the weak mid-term trend and ignored that housing stocks had fallen way more than housing indicators justified. I played it too safe, so to speak.
Anyhow, when I speak about leading indicators, I generally mean building permits and the NAHB housing market index. The NAHB index tracks single-family housing sentiment and is released one month ahead of building permits. That said, both indicators have not shown any signs of upside momentum since the end of their uptrend in 2018. The only thing that might count as higher sentiment is the fact that NAHB sentiment has recovered a little bit after imploding in H2 of 2018. Other than that, there is no denying that both indicators continue to be extremely weak.
