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Should You Sell Homebuilder Stocks as Housing Starts Slump?

Homebuilder stocks have not been long-term investments since the housing bubble popped in mid-2006, 10 years ago.

The five major homebuilders peaked a year before the home-price bubble popped, providing an early warning for the housing industry. Since these stocks lag their all-time highs, they have become trading vehicles, not long-term investments.

The best strategy is to buy them on weakness and sell them on strength.

D.R. Horton (DHI - Get Report) has rebounded out of correction and bear market territory after rising by 36.2% since its low, set on Feb. 9. This homebuilder reports on April 21, and analysts expect the company to earn 47 cents a share.

Must Read: Existing Home Sales Expected to Rebound and Could Be Stronger

KB Home (KBH - Get Report) is still in correction territory, despite a rise of 61.3% since its low set on Jan. 20. This homebuilder reported its latest quarterly earnings on March 23 and beat analysts' estimates. The stock dipped, but then moved higher.

Lennar (LEN - Get Report) is still in correction territory, despite a rise of 27.4% since its low, set on Feb. 11. This homebuilder reported its latest quarterly earnings on March 29 and beat analysts' estimates. The stock opened higher that day, then moved sideways.

Pulte Group (PHM - Get Report) remains in bear market territory, despite a gain of 27.7% since its low set on Jan. 20. This homebuilder reports on April 21. Analysts expect the company to earn 19 cents a share.

Toll Brothers (TOL - Get Report) remains in bear market territory, despite a gain of 23.7% since its low set on Feb. 11. This homebuilder does not report earnings until May 25. Early estimates call for earnings of 48 cents a share.

Investors who captured a portion of these gains should consider booking profits given recent stalled homebuilder sentiment and a plunge in housing starts.

The National Association of Home Builders Housing Market Index for April, which covers newly built single-family homes, stayed at 58 for the third month in a row, still above the neutral reading of 50. The NAHB is optimistic that that continued job creation and low mortgage rates will sustain continued demand for single-family homes.

The graph above shows the NAHB Housing Market Index vs. single-family starts. The HMI (in blue with its scale on the left of the graph) shows the steady reading to 58 in April. Single-family starts (in red with its scale on the right of the graph) shows the data for March, as this graph is produced each month before the release of the latest reading on housing starts.

Nationwide single-family...


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