Homebuilding stocks, traditionally seen as indicators of economic health and consumer confidence, may currently be sending cautionary signals to discerning investors. The once-vibrant real estate market seems to be on a tenuous footing, with recent data suggesting potential headwinds.
The National Association of Home Builders/Wells Fargo homebuilder sentiment index has provided a clearer picture, witnessing a dip from 50 in August to a worrying 45 this month. This decline isn’t an isolated incident, as Reuters highlighted that August already saw a drop, marking the first negative shift since December.
Mounting mortgage rates are the evident culprits, causing ripples of concern among potential homebuyers. And with the Federal Reserve’s insinuations about another interest rate hike in the offing, the real estate sector might feel further pressure.
Given this backdrop, it’s prudent for investors to recalibrate their strategies, especially regarding which homebuilding stocks to sell or steer clear of in the coming months.
One of the biggest homebuilding stocks, Lennar (NYSE:LEN) still has the goods to back up its lofty status. Since the start of the year, LEN gained over 23% of its equity value. Still, concerns are starting to creep in. On July 14, shares peaked at a closing price of $133.24. Since then, they lost almost 15%, with momentum continuing to point in the negative direction.
Although Lennar in its third-quarter earnings report produced a top-and-bottom-line beat, LEN has not looked impressive. It’s quite possible that trades are worried about the future implications of heightened interest rates, especially if inflation continues to run stubbornly high. Notably, following Lennar’s Q3 earnings, options flow data showed big block trades for sold calls, which generally have a negative implication.
Looking ahead, the company’s days inventory appears to be ticking higher. In its fiscal year ended November 2022, days inventory sat at 282.91. On a trailing-12-month (TTM) basis, this stat popped up over 6% to 301.06.
Given the poor chart performance, LEN could be one of the homebuilding stocks to sell.
Toll Brothers (TOL)
Another popular entity among homebuilding stocks, Toll Brothers (NYSE:TOL) also doesn’t immediately give off signals that something’s awry. Since the beginning of the year, TOL gained over 46% of its equity value. In the past 365 days, TOL moved up almost 75%. Undeniably, the contrarian bulls have enjoyed themselves with Toll Brothers.
However, party time could be coming to an end. Just in the past five sessions, TOL slipped more than 4%. What’s particularly worrisome is that since approximately mid-July, TOL’s price action has been relatively flat. And recently, it has accelerated to the downside. That’s not surprising because, since August, options flow data indicates that big block trades have dominated transactions with negative sentiment.
On the financials, days inventory may become a concern. For Toll’s fiscal year ended October 2022, this stat came in at 390.09. However, on a TTM basis, it swung up to 421.56. Also, it’s worth pointing out that in the quarter ended January, days inventory soared to 603.76. At the least, concerned investors should consider viewing TOL as one of the homebuilding stocks to avoid.
KB Home (KBH)
For a comprehensive look at the options dynamic involving KB Home (NYSE:KBH), you may want to consider my Barchart column regarding this very topic. On the surface, KBH seems like one of the top homebuilding stocks. Since the January opener, it swung up more than 42%. However, in the trailing month, it lost over 6%.
One factor that bothers me is KBH’s unusual options activity, particularly when it comes to options flow, which screens for big block trades likely made by institutions. To make a long story short, institutional traders appear to be placing “negative” wagers. In particular, they bought 2,608 contracts of the Jan 17 ’25 25.00 put, which is a bold bet.
At time of writing, KBH closed at $46.20, For the aforementioned option to be in the money, shares must fall nearly 46%. It could happen but that’s a major roll of the dice. Still, institutional investors have access to information and resources that retail investors lack. As a result, it’s possible that KBH is one of the homebuilding stocks to sell.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.