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Here are 3 reasons why investors should look at homebuilding stocks

Investors are taking another look at homebuilding stocks after new home sales surged in July, and two market experts believe that they've got the right idea.

U.S. new single-home sales rose to their highest level in nine years and the homebuilder stock-tracking ETF, XHB, rallied almost 2 percent off of the numbers. The stock price surge was led by real estate company Toll Brothers, whose stock jumped 9 percent on Tuesday after its second-quarter revenues exceeded forecasts.

Erin Gibbs, chief investment officer at S&P Global, sees the homebuilders as a good buy for investors for a number of reasons.

First, Gibbs points out that price targets for the XHB imply that the ETF still has a way to go.

"The average upside, according to Wall Street analysts, is about 9.5 percent," she said Tuesday on CNBC's "Power Lunch." "So we're still looking at good target prices above what it's trading now."

Second, the XHB is also strong from a valuation standpoint. "Valuation is 16 times forward earnings versus 18 for the S&P 500, and we're looking at an average earnings growth of 26 percent," said Gibbs. With Gibbs pointing out that the S&P 500's earnings per share growth is at 5 percent, this implies that investors could get higher growth for cheaper.

Finally, the XHB isn't just made of homebuilders like Toll Brothers and Caterpillar, but also many consumer discretionary stocks. The consumer discretionary sector is one of the strongest in the S&P 500 this year, allowing the XHB to ride to the upside as consumer stocks like Home Depot and Williams-Sonoma continue their climb.

"So across the board, we still think this is a good place to get in at a good value right now," added Gibbs.

Max Wolff, chief economist at Manhattan Venture Partners, also agrees that the XHB is a solid buy for investors to get into in the short term. However, how good of a buy will depend on a few factors going into the fall.

"I think that this is a pretty reasonable [trade] and a nice risk-reward trade-off if you want to buy basic consumer resiliency and macro stability," said Wolff. "I'm not sure if you want to buy those things, but if you do, this is a good risk-adjusted way to do it."

"Still, [there is] a lot of interest rate sensitivity here," he added. "[Plus] you're betting that the consumer kind of stays robust into the fall, and that the risk-on trade continues into the fall."

The XHB is currently up about 7 percent year to date and has been climbing steadily since February.


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Brian Sullivan

Brian Sullivan is co-anchor of CNBC's "Power Lunch" (M-F,1PM-3PM ET), one of the network's longest running programs, as well as the host of the daily investing program "Trading Nation." He is also a frequent guest on MSNBC's "Morning Joe" and other NBC properties.

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