Investor Alert
Jeff Reeves

Feb. 7, 2013, 9:21 a.m. EST

Move out of housing stocks ASAP

By Jeff Reeves

Homebuilders and housing stocks have been on a big run lately. The SPDR S&P Homebuilders ETF (XHB) is up over 40% in the last 12 months, more than tripling the broader S&P 500 index.

High-fliers in the sector are up even more dramatically, including almost 140% gains for PulteGroup (PHM) and almost 90% gains for Ryland (RYL).

But the music is going to stop for housing stocks even if their individual earnings and broad real estate data continue to improve. Much of the optimism is already priced in, and year-over-year growth is going to rapidly become less impressive.

Consider Home Depot (HD). The big-box home-improvement store is up over 40% in the last 12 months and 90% since the beginning of 2011. But lately, momentum in its fundamentals has slowed to a crawl, with just 5% revenue growth forecast for fiscal 2013 and a measly 3% in fiscal 2014. Earnings look a bit better, but after the projected 25% EPS increase or so in fiscal 2013, it settles into a much more modest growth rate of just 10% or so forecast for fiscal 2014. Yes, despite waning growth, it boasts a forward P/E of 19.

The story is similar for Lumber Liquidators (LL). The forward P/E ratio is over 29 after a stunning 160% run-up in the last 12 months. Growth estimates are more robust than HD with sales forecasts growing by the double-digits this year and next, and a projected 25% earnings increase. But you're telling me that growth isn't already priced in with that huge run? Or that it will continue to outperform? I'm going to go out on a limb and say the word is out on this momentum play.

The builders are more hit-and-miss, with some seeing most of their growth ahead of them and only modest appreciation in shares that may leave more upside. But a handful seem very overheated — including aforementioned winners Ryland and Pulte. Ryland was just downgraded to "underweight" at Barclays on Feb. 5 with a $35 target — lower than current valuations — after its meteoric rise. Same for Pulte, which was lowered to "hold" at Deutsche Bank with a $17 target.

And then the ultimate of contrarian signs for housing: The January IPO of Tri Pointe Homes Inc (TPH). Shares are down almost 8% in just a few trading days.

The story about housing, in my mind, reflects a broader truth about investing: Wall Street doesn't really care about your cost basis or personal experience with a stock. It only cares about current investor interest, current headlines and future forecasts. Past performance and cost basis don't matter.

So the real question is, in a vacuum, if you stepped out of a black hole with $10,000 of play money and no previous skin in the game ... would you buy housing stocks right now, at these prices, with the current data?

Probably not.

I mean, what about the current situation in housing makes you think these gains will keep up and deliver outperformance from this moment in time? What makes you think that the market hasn't already priced in the optimism? What happens if future headlines are "less good" than desired?

Look at housing stocks in a vacuum and ask yourself these questions — and please leave your thoughts on the sector below or hit me up on Twitter . I'm pretty confident that most investors will agree that now is a time to take profits, not put new money into housing stocks.

Write Jeff at editor@investorplace.com or follow him on Twitter via @JeffReevesIP.

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