Trading Nation

With housing heating up, here’s how to play the homebuilders

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After new and existing home sales surged to their highest levels in years during April, traders are looking for opportunities in housing stocks.

As home prices rise, traders are suggesting two areas for investors to get a foot in the housing stocks' door.

On Thursday, S&P Investment Advisory equity chief investment officer Erin Gibbs said her team was focused on retail stocks in the S&P 500 Homebuilders ETF (XHB).

The XHB finished the day at $34.01, a level it hadn't seen since January. Meanwhile, analysts don't appear particularly bullish — the average analyst price target implies upside of just 4.5 percent from current prices, according to Gibbs.

"If you delve into the homebuilders, the ones that look like they have real opportunity are more of those retailing home-goods type of companies," she said on CNBC's "Trading Nation." "One of our absolute favorites is Williams-Sonoma. They've been doing really well and have had very positive surprises."

Williams-Sonoma has been a favorite among traders even as other big name retail stores have fallen. The home goods company saw its share prices rise 3 percent after late Wednesday's better-than-expected earnings announcement.

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Given that the new home sales acted as a powerhouse in driving the U.S. housing market, traders are also recommending companies that focus on that section of the market. While Stacey Gilbert, head of derivative strategy at Susquehanna Financial, is surprised at the lack of options activity among housing stocks, she believes there are opportunities in new-homes-focused companies.

Gilbert points to luxury homes builder Toll Brothers as a sound bet.

"We do see upside here, we do think Toll Brothers is trading from a valuations perspective at historical trough levels both price to earnings and price to book," she said on Thursday's "Trading Nation."

"The new home sales that we're talking about, they are helped when the existing home sales also are positive. That helps these homebuilders, particularly for companies like Toll Brothers."

To play the Toll Brothers stock from an options perspective, Gilbert recommends owning the September 27-strike calls.