Lennar is grinding through a deep cup-with-handle base and closing in on a buy point. The homebuilder stock has shown relative strength by outperforming the S&P 500 index.
Lennar is ranked 10th out of 22 stocks in the Building-Residential/Commercial industry group. The sector has lost steam after a strong fourth quarter, dropping to 94th from the 71st spot out of the 197 IBD groups.
The Florida-based homebuilder specializes in single-family, attached, adults over 55 and multigenerational-focused homes in 26 states. Lennar homes feature "smart" technology that includes video doorbells and energy-efficient appliances.
The national average for a 30-year fixed mortgage hit a high of over 7.2% on Nov. 11, according to bankrate.com. But it has been pulling back since that time.
The benchmark rate dropped to the 6.5% range in the last week. This is good news for homebuyers as Lennar homes aren't cheap, costing on average in the $440,000 to $450,000 range.
Homebuilder Stock
LEN stock has worked its way higher after a gap-down that followed its fiscal Q4 earnings release on Dec. 14. Shares are now within 2% of the 94.34 buy point in a long, deep, cup-with-handle base.
However, the broad outlook remains at "market in correction", warning of elevated risk. As a result, investors should wait for clear signs of a sustained stock market rally before making new buys.
The stock rose 3.8% after the earnings report in heavy volume and pulled back, testing its 21-day exponential moving average. Fresh buying interest emerged on Dec. 29, continuing into this week. Shares are lower Thursday but still close to the buy point.
The stock is trading about 19% off its 52-week high. The relative strength line is at a new high, as indicated by the blue dot on the MarketSmith chart. A rising RS line indicates the stock has outperformed the S&P 500 index.
Mixed Earnings Report But New Home Supply A Plus
Lennar reported better-than-expected Q4 EPS and sales but noted a 15% decrease in new orders amid a 21% backlog. Gross margin dipped to 24.8% from 29.2% in the prior quarter. Management expects a further margin decline to 21% in Q1 2023 due to higher construction costs.
"Our sales volume and pricing have clearly been impacted by rising interest rates, but there remains a significant national shortage of housing, especially workforce housing, and there is still demand as we navigate the rebalance between price and interest rates," said Executive Chairman Stuart Miller.
November-ended Q4 earnings of $5.02 per share marked a drop from $5.18 in Q3, but a 15% year-over year increase. Sales grew to $10.2 billion from $8.9 billion in the prior quarter. Both EPS and sales growth decelerated on a quarter-over-quarter basis. This is something to watch as IBD's investment strategy seeks accelerating growth.
Lennar has a 23% return on equity, above the 17% minimum sought by the CAN SLIM investing strategy. ROE is a measure of profitability, and how a company uses its assets.
Mutual funds own 57% of the homebuilder stock, with 1,813 funds holding positions in December, up from 1,769 in September. Large growth Fidelity Contrafund (FCNTX), an IBD Mutual Fund Index component, has been adding shares for the last three quarters.
The "I" in CAN SLIM stands for institutional sponsorship. Increased ownership is a positive sign, as big money mangers can move the stock on large purchases.
