June 9th, 2012
Written by John Lounsbury
Housing markets have experienced a historic collapse and homebuilders have seen their businesses decimated. But would you be surprised to know that the stocks of many homebuilders have been outperforming the broader market (as represented by the S&P 500 index) and even gold over the past 39 months? Well sit down and hold onto your seat – you are about to find out that this is true. And the outperformance is not just by a little bit – it is by a wide margin. While many people have been avoiding stocks in the homebuilding sector because of housing market woes, many of these stocks have been on a tear. For things of value people like to say they are "as good as gold." Well, for homebuilder stocks over the past three plus years they have been better than gold.
Investors tend to watch data such as new homes sold reported monthly by the U.S. Census Bureau. An article earlier this week carefully examined the relationship between new home sales data and the stocks of homebuilders. The results, although possibly surprising, are very clear: there is little correlation. Investors are wasting their time making decisions about when to buy or sell homebuilder stocks based on the latest sales data (or even the recent trends) collected by the Census Bureau.
While those who have been put off homebuilder stocks because of the bad housing market data, they have been losing money if they were buying gold or investing in the S&P 500 index. The following graph from Yahoo Finance tells the story of what has happened to the three investments over the past 39 months:
Click on any chart for larger image.
The three lines are for three ETFs (electronically traded funds):
- XHB - SPDR S&P Homebuilders (NYSE: XHB) Blue
- SPY - SPDR S&P S&P 500 Index (NYSE: SPY) Red
- GLD - SPDR Gold Shares (NYSE: GLD) Green
Sorry gold bugs – GLD comes third in this three horse race. And the homebuilders ETF (XHB) has gained approximately 40% more than SPY. The return for XHB is approximately double that for gold. In addition the advantages for XHB have been solid for about 90% of the time span and SPY has never had an advantage at any time over the 39 months. Gold showed a return advantage for a little less than a month in the summer of 2011 when it surged to its all-time high above $1,900 an ounce.
The comparative returns do not include dividends, which for the most recent 12 months are 1.88% for SPY, 0.73% for XHB and none for GLD.
I have examined the relative performance for XHB and the five homebuilder stocks in its top ten holdings - other top ten stocks are for companies like Home Depot (NYSE:HD) and Bed, Bath & Beyond (NYSE:BBB) – plus four other homebuilders that I have followed over the years. Three time periods have been examined: (1) 39 months, (2) last 2 years, and (3) last 8 months.
Performance since March 6, 2009
For this section the nine homebuilder stocks have been divided into two groups. The graphs for both groups also contain the ETF XHB. Group 1 is those stocks that gained more than 100% since March 6, 2009:
- Hovnovian, NYSE:HOV
- DH Horton, NYSE:DHI
- Lennar, NYSE:LEN
- NVR, NYSE:NVR
The second group contains those stocks that are up less than 100% since March 6, 2009:
- Pulte Group, NYSE:PHM
- Toll Brothers, NYSE:TOLL
- Ryland Homes, NYSE:RYL
- MDC, NYSE:MDC
- KB Homes, NYSE:KBH
One stock, KBH, is actually down for the 39 months.
Only two of the nine individual homebuilders significantly outperformed XHB over the 39 months and two more were close to equal performance. The remaining five stocks all underperformed XHB and SPY as well, with two of them barely finishing above even and one losing money over the 39 months.
Four homebuilders far outperformed GLD, two had nearly the same performance and three underperformed.
Five of the nine stocks pay dividends but these have not been included in the return comparisons.
So over the past 39 months an investor would have been doing very well to hold XHB.
Performance Over the Past Two Years
Here we have divided the stocks into two groups: Those that gained (five stocks) and those that lost money (4 stocks).
XHB has been included on both charts. Only one stock has significantly outperformed XHB. Investors again would have done well to have owned the ETF over the past two years than many of the individual homebuilder stocks.
Eight Month Performance
Here again we have divided the stocks into two groups: Those that gained more than 80% and those that gained less.
The past eight months have been the strongest of the three time intervals examined for the individual builder stocks and for XHB, but this period was the only one where there was significant opportunity for advantage by holding individual stocks: Seven of the nine stocks outperformed XHB and all seven had large margins of greater gain.
The next question, of course, where will these stocks and this ETF go from here. That is a story we will save for another day.
- When to Buy Homebuilder Stocks by John Lounsbury at Investing Daily, 4 June 2012
- Economic Data Points to Growing Profitability in Residential Builders by John Lounsbury and Steven Hansen at GEI Investing, 22 January 2011