Thursday’s ETF To Watch: Homebuilders SPDR (XHB)

by on June 16, 2011 | ETFs Mentioned:

Thanks to sluggish growth and ongoing fears over the long-term health of the American economy, the housing market across the country remains incredibly weak. With unemployment over 9.0% and many homeowners being underwater in their mortgages, sales and demand for new housing has slipped considerably since the housing crisis began almost three years ago. While prices, according to the S&P Case-Shiller HPI, did manage to post modest gains in early 2010, home values are now slumping yet again, putting the index firmly into double dip territory. While the data may be gloomy according to the Case-Shiller index, investors will look for a glimmer of hope later today from two key data points in order to give some relief for the beaten down housing sector.

Later today, housing starts for May will be released, and analysts expect the seasonably adjusted annualized figures to accelerate slightly to 547,000 up from last month’s reading of 523,000. However, it should be noted that the consensus range is relatively wide according to Bloomberg, with projections ranging from 530,000 on the low end and 560,000 on the high end, suggesting that virtually all analysts are anticipating at least a modest overall increase.  Housing starts have been pretty much flat since subprime crisis in the fall of 2008 as the five month average is hovering below the 600,000 mark, a level that has only been breached a few times since the bottom fell out of the market. Nevertheless, investors did a brief uptick in March’s figures only to see those gains erode in April, putting extra pressure on May’s release to set the tone heading into the summer [Three ETFs That Could Be Crushed By Housing Double Dip].

Additionally, investors will likely hone in on Pier One (PIR) as well, as the company looks to give its quarterly earnings report before the bell today. The Texas based company is highly dependent on new home sales in order to help boost earnings as many consumers will buy new products to furnish their homes, boosting demand for Pier One’s various products. Analysts expect the company to post EPS of nine cents a share on revenues of $331.4 million, a modest increase from the year ago period in which the company posted earnings of seven cents on sales of $306.3 million. The company beat earnings last quarter by one cent so analysts will look for the same to happen later today and will also listen for guidance on how PIR feels the housing crisis will impact its bottom line for the rest of the year [Three ETFs To Watch During Hurricane Season].

Thanks to this key data release as well as the earnings report of PIR, investors should look for the SPDR Homebuilders ETF (XHB) to remain in focus throughout today’s trading session. Not only does XHB consist of some of the country’s largest pure homebuilders such as PulteGroup and D.R. Horton, but the company also gives its second biggest weighting to Pier One Imports at just over 4.4% of the total. Thanks to this heavy weighting to PIR, as well as a number of other similar companies populating the list of top holdings for XHB such as Bed Bath & Beyond, investors should look for this State Street product to be in for a volatile trading session [see more holdings of XHB here].

So far in 2011, XHB is managing to hang on to a tiny gain of 0.1%, despite losses of close to 6% in the past two weeks alone. This tumble was largely due to the Case-Shiller HPI release that showed a double dip in home prices, helping to confirm the bearish trend in the industry. Although, if home starts come in above expectations and if PIR is able to issue solid guidance, the fund could reverse some of these losses and rise on the day. If, however, housing starts continue to slump in light of the bearish price data, and if PIR falls to beat its earnings estimates, XHB could continue its short term trend and finish Thursday trading down in the year-to-date performance column [see more fundamentals of XHB here].

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Disclosure: No positions at time of writing.