Meritage Homes is today's selection for IBD 50 Stocks to Watch as the homebuilder trades near a buy point and the industry pins its hopes on lower mortgage rates ahead.
The stock broke out past the 189.96 buy point of a lopsided cup-without-handle base on July 16. The price action since then has been anything but smooth. Shares have been jumpy, up as much as 8% from the entry but mainly holding above it.
Thursday morning, Meritage Homes shares were down about 2% and just below the buy point. There's no imminent sell signal and the relative strength line is near the highest levels of the stock's basing period, a positive sign.
Several homebuilder stocks have broken out to new highs the past few weeks, including Hovnanian Enterprises, Green Brick Partners and KB Home.
But Meritage Homes has the highest Composite Rating of 22 companies in IBD's homebuilding industry group, scoring a 96 out of a best-possible 99.
Meritage Homes Outperforms Industry
One reason for that is the company's sharp recovery from a string of declining profits and mixed revenue. Per-share earnings jumped 43% in the first quarter of this year and Meritage Homes followed that up with a 26% increase in the second quarter, according to IBD MarketSurge.
Analysts expect Meritage's earnings to rise only 1% this year. Yet, homebuilding stocks have gotten a tailwind with rising expectations for an interest-rate cut as early as September. Odds for a quarter-point rate cut are now above 90%, based on bond market data.
Since the consumer price index came in cooler than expected on July 11, the IBD homebuilding group is up nearly 12%. Meritage Homes stock is outperforming the industry, up more than 16% in that period. Meanwhile, the 10-year Treasury yield has continued to ease.
Shortage Equals Favorable Outlook
With a shortage of housing units, the outlook for homebuilder stocks is favorable. It could further improve once mortgage rates come down. Higher borrowing rates have crimped the industry, although rates are easing.
The median home price rose 4.1% in June from the year-ago period to a record $426,900, according to the National Association of Realtors. June existing-home sales fell 5.4% from May and from a year ago.
New home sales fell 0.6% in June from the prior month, below forecasts for a 3.4% increase. And June housing starts rose 3% from May while building permits climbed 3.4%.
While those were encouraging numbers for companies like Meritage Homes, starts were nearly 20% lower than in March 2022, when the Fed started raising interest rates, BMO Capital Markets Senior Economist Jay Hawkins said in a report. Most of the June increase was in apartments and other multifamily housing projects.
