The U.S. housing recovery, which by some measures is about one year old, continues to build steam.
On July 24, the Commerce Department reported June sales of new U.S. homes surged to a five-year high. Sales of single-family homes rose 8.3% to a seasonally-adjusted annualized rate of 497,000 units.
One of the most appealing homebuilders, based on its bullish technical and fundamental outlook, is Beazer Homes USA, Inc. (NYSE:BZH).
Beazer Homes USA, Inc. (NYSE:BZH) is one of the 10 largest single-family homebuilders in America, based on the number of units closed.
The company builds in 16 U.S. states and specializes in making energy-efficient homes that target middle- and upper-class buyers.
With a growing number of middle- and upper-class citizens interested in purchasing new homes, Beazer Homes USA, Inc. (NYSE:BZH) plans to increase its average home price to $253,000 in 2013 from $225,000 last year. Management anticipates this increase will push margins to 15.6% this year from 10.5% last year.
In 2013, the company plans to spend about $550 million on purchasing and developing land, and build 170,000 new homes by 2014.
From a technical perspective, the shares are appealing.
From the October 2011 low of below $7, the stock has formed a major uptrend and gained over 150% to date. But the growth is likely not over yet.
In early 2012, the stock peaked just below $20, but retreated, finding support around $11. Throughout all of 2012 and much of the first half of 2013, the stock bounced between resistance around $20 and support around $11. This trading activity created a long-term rectangular holding pattern.
Typically, rectangles resolve in the direction they are first entered. This means Beazer Homes USA, Inc. (NYSE:BZH) should eventually break out to the upside.
In late April 2013, shortly after the stock hit a low of $13.91, shares rocketed higher, breaking above important $20 resistance and resolving the long-term consolidation pattern. Shares moved to a multi-year high of $23.29, but peaked at this level.
Over the ensuing weeks, the stock dipped several dollars, forming a minor downtrend line. New support was established near $16.48.
In early July, the minor downtrend line bullishly broke as shares moved from the $16.48 low to a $19.30 high in a week. They have since retreated, but are holding well above $16.48 support.
If shares can successfully re-challenge and penetrate the $20 resistance, they are likely to retest the $23.29 peak. At current levels, this represents nearly 30% potential returns. If the stock can break above this multi-year high, shares could foreseeably move much further ahead.
The bullish technical picture is supported by upbeat fundamentals.
For the upcoming third quarter, scheduled to be reported on Aug. 1, analysts project increased demand will cause revenue to surge 30.5% to $332.2 million compared to $254.6 million in the year-ago quarter.
For the full 2013 year, analysts expect increased home sales will cause revenue to increase 30% to $1.3 billion from $1 billion last year.
The earnings outlook is also optimistic.
Based on an expected increase in prices paid for sold homes, analysts expect earnings in the upcoming quarter will rise to -$0.37 per share from -$2 per share in the comparable year-earlier period.
Driven by increased demand and higher prices, analysts see the full-year 2013 earnings loss narrowing dramatically, to -$1.82 per share compared to -$5.43 per share in 2012.
Given the bullish technical and improving fundamental outlook, I plan to go long on the homebuilding stock.
Risks to consider: The improving economy is spurring the U.S. homebuilding market. However, if the economy slows, so will demand for new homes. Purchasers of the stock should monitor U.S. economic growth statistics closely with an eye on any incipient weakness.
Recommended Trade Setup:
— Buy BZH at the market price
— Set stop-loss at $14.92, slightly below support
— Set initial price target at $23.29 for a potential 33% gain
The article If This Homebuilder Retests Recent Highs, You Could Reap 33% Returns originally appeared on ProfitableTrading and is written by Melvin Pasternak.
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