This ‘unusual’ set of stocks could deliver both value and growth

Trading Nation: Homebuilders rally

Homebuilder stocks are on the rise, and it's not too late to invest in them because more upside is ahead, according to some strategists.

A bevy of recent tailwinds boosted home construction names Tuesday:

  • Home resales in the U.S. fell further than expected last month.
  • The number of homes for sale fell to the lowest level since 1999, shedding light on a tight housing market.
  • The largest U.S. home construction company, D.R. Horton, reported better-than-expected earnings and revenue on Tuesday, pushing a popular homebuilding exchange-traded fund (XHB) nearly 3 percent higher for its best day in eight months.
  • Homebuilders Toll Brothers, PulteGroup and KB Home ended the day 3 to 6 percent higher.

"This is one of those industries that's unusual, that we actually have growth with attractive valuations," Erin Gibbs, equity chief investment officer at S&P Global, said Tuesday on CNBC's "Power Lunch."

She called homebuilders "one of the better industry bets," saying they are expected to see 15 percent earnings growth for next year, beating out that of the S&P 500's 12.3 percent. She also said their forward price-to-earnings ratio is 10.5, versus 18 times for the overall S&P 500.

"It actually looks like a good entry point, and even the consensus price on these stocks is about 16 percent higher than where they're trading now, so we're looking at decent gains about what Wall Street's expecting, so across the board, looking good," Gibbs said.

From a technical perspective, homebuilder names look poised for gains, according to Chris Verrone, head of technical analysis at Strategas Research Partners.

"Now let's remember, the homebuilding index has basically been sideways for four years. Four years of no price progress. Four years ago, these names were trading about 19 times earnings, now they're trading 10 times earnings at the same level. So the earnings have gotten better even while the stocks have gone nowhere," Verrone said Tuesday on CNBC's "Power Lunch."

He added that ultimately, the momentum the stocks are beginning to exhibit at this juncture is a positive sign for the future.

Verrone recommends Toll Brothers and KB Home in terms of small-cap names in the space that are starting to turn for the better.