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Housing ETFs to Buy on D.R. Horton Beat & Likely Fed Rate Cut

Sanghamitra Saha

D.R. Horton (DHI), one of the biggest and well-known homebuilders in the nation, came up with upbeat third-quarter fiscal 2019 results. Earnings came in at $1.26 per share in the quarter, surpassing the Zacks Consensus Estimate of $1.06 by 18.9%. The reported figure also increased 7% from the year-ago profit level of $1.18. Total revenues (Homebuilding, Forestar and Financial Services) came in at $4.91 billion, up 10.6% year over year. The reported figure also topped the consensus mark of $4.51 billion.

The stock gained 5.7% in the key trading session on Jul 30, reflecting the earnings results.  However, net sales orders rose 6% to 15,588 homes, falling short of the FactSet consensus of 15,724, while the value of orders grew 8% to $4.7 billion to meet expectations, as quoted on MarketWatch. Shares of DHI fell 1.9% after hours.

Weak sales scenario is not new for homebuilding industry. U.S. existing home sales, which make up the major chunk (about 90%) of the U.S. housing market, declined more than expected in June as a supply crunch pushed prices to a record high. However, subdued sales data did not stop housing stocks and ETFs from soaring this year. SPDR S&P Homebuilders ETF XHB is up 29% this year.

What’s Making This Rally Possible?

The Fed will in all probability cut rates by about 25 bps in its July meeting. The U.S. central bank hasn’t enacted any rate hike so far this year, unlike in 2018. This has resulted in lower mortgage rates, which in turn is benefiting housing ETFs (read: What's Driving Housing ETFs Despite Subdued Sales?).

Earnings have been pretty good in the sector. Apart from D.R. Horton, PulteGroup Inc. PHM, NVR Inc. NVR, KB Home KBH, Meritage Homes MTH and Lennar Corporation LEN have also reported better-than-expected results in recent times.In the past month (as of Jul 30, 2019), KBH, LEN, PHM and MTH added 5.9%, 0.1%, 1.5% and 23.3%. Also, DHI stock returned about 7.9%.

Investors should also note that homebuilding stocks come from a top-ranked Zacks industry (top 12%). It means that though there is substantial sales pressure, homebuilding companies are managing to stay afloat (read: Will Trump Policies Spell Trouble for Homebuilding ETFs?).

Market & ETF Impact

The subtle bullishness over such an important homebuilding stock (D.R. Horton) caused an uptick in housing ETFs on Jul 30. The ongoing Fed meeting and heightened speculation of a rate cut this month also added to the optimism.  The fund XHB added 0.4% after hours on Jul 30. iShares U.S. Home Construction ETF ITB gained about 2.2% on Jul 30.

DHI and LEN stocks take about 12.8% and 11.8% of the fund ITB, respectively. XHB follows a more spread-out approach with no stock accounting for more than 4.95% of the portfolio. DHI takes 4.3% of the fund and gets a position in the top holdings.

In a nutshell, investors who want to bet on the Fed’s dovishness and upbeat earnings, may easily take the ETF route for investing in the housing market. This is because a basket approach always safeguards investors from stock-specific volatility.

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NVR, Inc. (NVR) : Free Stock Analysis Report
Meritage Corporation (MTH) : Free Stock Analysis Report
PulteGroup, Inc. (PHM) : Free Stock Analysis Report
Lennar Corporation (LEN) : Free Stock Analysis Report
KB Home (KBH) : Free Stock Analysis Report
iShares U.S. Home Construction ETF (ITB): ETF Research Reports
SPDR S&P Homebuilders ETF (XHB): ETF Research Reports
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