Chart Says This 250% Comeback Stock Has More Gains Ahead
In its heyday during late 2005, homebuilder Lennar Corp. (NYSE: LEN) peaked near $70. In August 2010, and as late as October 2011, the shares could be picked up for around $12, meaning they had shed well over 80% of their value. Since October 2011, however, riding the back of the U.S. housing and homebuilding recovery, the company has roared ahead about 250% to date.
Despite consolidating for more than three months between October and late December, the shares remain solidly above their rising 40-week moving average. The answer for the uptrend is simple: The company has been knocking the cover off the ball for earnings estimates.
Both the technicals and fundamentals say the stock should continue moving higher. From current levels, I expect roughly 20% gains, as I don't think the stock will stall until it tests round number resistance at $50.
Miami-based Lennar was started in 1954, and is now the third-largest homebuilder in the United States. It currently operates in 18 states. Its strongest geographical presence is on the East Coast between Florida and Massachusetts, but it also operates on the West Coast (California and Oregon) and has holdings in the Midwest and far west.
The company builds houses in several brackets such as affordable, move-up and retirees. It focuses on urban, golf course, adult active living and suburban developments. As of November 2011, it owned nearly 95,000 development lots with an option to buy almost 17,000 more, so it won't run out of land to build on anytime soon.
Technically, Lennar's stock chart is extremely strong.
After bottoming at $11.73 in August 2010, the shares rallied to resistance just above $21 in February 2011. Turned back by strong resistance at this level, they headed south, and by October 2011, probed the $12 mark forming a potential double-bottom. Bouncing strongly off this level, they completed an almost two-year base in early 2012, rallying back above the key 40-week moving average, which began sloping upward.
Since the October 2011 bottom, LEN stock has been in an extremely strong uptrend rallying around 250% in about 16 months. Noteworthy is that shares remained above the 40-week moving average for the entire calendar year of 2012, and that the moving average is roughly paralleling the uptrend line. I find that pattern is often a signature of strong uptrends.
In October, the stock stalled just under the technically significant $40 level. Although you won't see it on this chart, that was not only round-number resistance, but $40 had acted as key historical resistance in 2004, 2006 and 2007.
In the past two weeks, LEN has poked its nose above this resistance level. Moving Average Convergence/Divergence (MACD) is about to give a renewed buy signal, and the Relative Strength Index (RSI), while strong at 66, is not yet overbought, allowing the shares to move higher from here.
The October to December rectangular consolidation having been resolved to the upside, I see the next logical resistance at $50, about 20% higher than where the shares are currently trading. Good support can be found just under $37, near where the shares were trading in late December.
Fundamentally, Lennar has an extremely strong tailwind. During the trading week of Jan. 14, the U.S. Commerce Department reported that December housing starts increased 12.1% above November levels to an annual rate of 954,000. This level was nearly double that of the April 2009 bottom. Home prices across the nation have risen for several straight months, and higher homes prices track rising housing activity.
As a company, Lennar delivered blowout results in fiscal 2012, ended in November. It beat earnings expectations in all four quarters by substantial margins. For the fiscal fourth-quarter, released on Jan. 15, the company's revenues remained roughly unchanged from 2011 levels at $1.35 billion, but earnings exploded 250% from $0.16 in the fourth quarter of 2011 to $0.56 in the comparable quarter of 2012.
Moreover, the company exceeded analysts' consensus estimates of $0.44 by 27.3%. That continued the 2012 pattern where the company beat in all quarters. The beats were dramatic: 100% in Q1, 1,112% in Q2 (that is NOT a typo) when the company was helped by a one-time item, 43% in Q3 and 27% in Q4.
For full-year 2013, ending in November, analysts expect the company to hit $5.4 billion in revenue and earn $1.69. As the housing recovery gains steam in fiscal 2014, they see revenues rising 27% to $6.87 billion. They project earnings per share to gain ground even faster expanding 35.5% to $2.29.
Risks to consider: Housing stocks may be hurt if Congress were to place limits on the mortgage interest reduction. Buyers are also held back by tight mortgage financing credit. The ongoing fiscal discussions are a threat since they could provoke a stock market sell-off and stall the economic recovery if the Democrats and Republicans cannot find a middle ground. Still, I think Lennar has enough momentum to trade higher.
Recommended Trade Setup:
-- Buy LEN at the market price
-- Set stop-loss at $36.79, below late December support
-- Set initial price target at $49.95 for a potential 19% gain in five and a half months (June 30)
-- Risk/reward ratio: 1.6:1