Fundamentals
My trading algorithm doubled down on KB Home today due to a substantial increase in Wall Street consensus earnings forecasts. I estimate that forward P/E on the stock is about 5, and forward P/S is about 0.6. (But note that my forecasts are more optimistic than the Street consensus, which currently puts forward P/E at 6.7.) I estimate that KBH will yield about 2.3% in dividends over the next 12 months. Most impressive of all is KBH's 5-year growth rate. 8% earnings growth, 3% sales growth, and 12% dividend growth. KBH has about 21% upside to its median earnings-date multiple of the last 5 years, making it one of the most undervalued stocks I follow (second only to NRG). KBH has received large earnings upgrades even as the stock price fell. The earnings outlook gets a score of 6/6 from me. Recent movement in the bond market seems to favor lower future mortgage rates, which would be good for housing demand.
The main downside here from a fundamental point of view is that KBH has substantial debt and weak free cash flow, with P/FCF near 18. S&P Global gives KBH a 43.5/100 fundamentals score due to low margin and somewhat weak financial health.
Neutral sentiment
Homebuilder sentiment is somewhat weak because of data showing that a growing number of home buyers think it's a bad time to buy a home. That's a concern, but this data isn't a strong leading indicator of prices. Even when they think it's a bad time to buy, consumers seemingly buy anyway. Presently buyers also have some competition from hedge funds, who've been snapping up single-family houses as investment properties.
The analyst summary score for KBH stands at 4.4/10, unchanged over the last 30 days. The put/call ratio is 1.1, slightly bearish. However, KBH is currently trading 35% below the average analyst price target, making it the second most undervalued stock I follow by this measure (after fellow homebuilder MDC Holdings). I think sentiment will flip as soon as KBH gets some "constructive" movement in price. (See what I did there?)
Technicals
KBH is below its 200-day EMA, and the 20-day and 50-day EMAs are pointed downward. It's also got a down-trending resistance line. Overall, this would seem to favor a continued selloff.
However, KBH has some support in this area, and there was a big spike in volume a couple days ago when KBH reported earnings. (KBH beat analyst earnings estimates but missed on sales. Guidance was optimistic.) I find that volume tends to spike at inflection points, either a short-term top or a short-term bottom. So I'm thinking that KBH might bottom here short-term.
Strategy
I've gone ahead and bought a few shares in anticipation of a bullish breakout, and I've set an alert to pick up some more shares after the price moves up through the red resistance line.
If we do get a short-term bottom here, I'm looking for about $43.75 from the initial leg up. Whether we keep going up from there will depend on whether analysts upgrade the stock. I think it's pretty absurd for a company with strong growth to be trading at such low price multiple. So based on valuation alone, I'd expect analysts to get more bullish here. But any increase in home inventories and mortgage rates or decrease in median home selling price might weigh on sentiment, so be aware of that risk. KBH's fate will definitely be influenced by larger market conditions.
If sentiment stays strong, I'll diamond-hand my way up to a second price target at $47, and a third target at $49.50.
My trading algorithm doubled down on KB Home today due to a substantial increase in Wall Street consensus earnings forecasts. I estimate that forward P/E on the stock is about 5, and forward P/S is about 0.6. (But note that my forecasts are more optimistic than the Street consensus, which currently puts forward P/E at 6.7.) I estimate that KBH will yield about 2.3% in dividends over the next 12 months. Most impressive of all is KBH's 5-year growth rate. 8% earnings growth, 3% sales growth, and 12% dividend growth. KBH has about 21% upside to its median earnings-date multiple of the last 5 years, making it one of the most undervalued stocks I follow (second only to NRG). KBH has received large earnings upgrades even as the stock price fell. The earnings outlook gets a score of 6/6 from me. Recent movement in the bond market seems to favor lower future mortgage rates, which would be good for housing demand.
The main downside here from a fundamental point of view is that KBH has substantial debt and weak free cash flow, with P/FCF near 18. S&P Global gives KBH a 43.5/100 fundamentals score due to low margin and somewhat weak financial health.
Neutral sentiment
Homebuilder sentiment is somewhat weak because of data showing that a growing number of home buyers think it's a bad time to buy a home. That's a concern, but this data isn't a strong leading indicator of prices. Even when they think it's a bad time to buy, consumers seemingly buy anyway. Presently buyers also have some competition from hedge funds, who've been snapping up single-family houses as investment properties.
The analyst summary score for KBH stands at 4.4/10, unchanged over the last 30 days. The put/call ratio is 1.1, slightly bearish. However, KBH is currently trading 35% below the average analyst price target, making it the second most undervalued stock I follow by this measure (after fellow homebuilder MDC Holdings). I think sentiment will flip as soon as KBH gets some "constructive" movement in price. (See what I did there?)
Technicals
KBH is below its 200-day EMA, and the 20-day and 50-day EMAs are pointed downward. It's also got a down-trending resistance line. Overall, this would seem to favor a continued selloff.
However, KBH has some support in this area, and there was a big spike in volume a couple days ago when KBH reported earnings. (KBH beat analyst earnings estimates but missed on sales. Guidance was optimistic.) I find that volume tends to spike at inflection points, either a short-term top or a short-term bottom. So I'm thinking that KBH might bottom here short-term.
Strategy
I've gone ahead and bought a few shares in anticipation of a bullish breakout, and I've set an alert to pick up some more shares after the price moves up through the red resistance line.
If we do get a short-term bottom here, I'm looking for about $43.75 from the initial leg up. Whether we keep going up from there will depend on whether analysts upgrade the stock. I think it's pretty absurd for a company with strong growth to be trading at such low price multiple. So based on valuation alone, I'd expect analysts to get more bullish here. But any increase in home inventories and mortgage rates or decrease in median home selling price might weigh on sentiment, so be aware of that risk. KBH's fate will definitely be influenced by larger market conditions.
If sentiment stays strong, I'll diamond-hand my way up to a second price target at $47, and a third target at $49.50.
Comment:
Just to illustrate how a volume spike can signal an inflection point, here's a setup I made money on today. (I offer no complicated valuation analysis on this one, just a volume spike and a bullish trend line crosss.)
Comment:
Also bullish for homebuilders, from the Wall Street Journal:
"Millions of homeowners who are behind on their mortgage payments would get added protections from foreclosure through the end of 2021 under a set of rules completed Monday by the Consumer Financial Protection Bureau."
"Millions of homeowners who are behind on their mortgage payments would get added protections from foreclosure through the end of 2021 under a set of rules completed Monday by the Consumer Financial Protection Bureau."
Comment:
Case-Shiller home price index data this morning was red-hot:
www.cnbc.com/2021/06...se-shiller-says.html
www.cnbc.com/2021/06...se-shiller-says.html
Comment:
Technicals looking constructive on this homebuilders' ETF:
Comment:
Comment:
MDC Holdings just broke out.
KBH and MDC are similarly undervalued homebuilder stocks and have been trading in sympathy with each other. KBH has a bit further to go to the trend line, but it's above the 200 EMA this morning.
KBH and MDC are similarly undervalued homebuilder stocks and have been trading in sympathy with each other. KBH has a bit further to go to the trend line, but it's above the 200 EMA this morning.
Comment:
News from homebuilder surveys has been quite negative in the last week, so I exited this trade. Seems like the sector is being hit hard this summer by a combination of supply chain problems, labor shortages, and buyer hesitancy.
Comment:
I hopped back in after market today, because KBH more than doubled its share buyback program.
Comment:
Quick update: the shares I bought after-market are up over 2% this morning, and I also picked up some August 20 calls at the $41 strike.
Comment:
KBH is trying for a breakout again today, though not with strong volume yet. Cost of building materials is down, and a BofA note says that although US housing demand will slow, they don't think we'll see a "bubble" burst.
Comment:
Comment:
With small caps back in the lead, my KBH calls are comfortably in the green.
Comment:
Took partial profit on my position because pending home sales came in weaker than expected this morning.