Zacks Investment Ideas feature highlights: Pulte, Ryland, Toll Brothers, KB Homes and Lennar

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Jun 10, 2011, 09:30 ET

CHICAGO, June 10, 2011 /PRNewswire/ -- Today, Zacks Investment Ideas feature highlights Features: Pulte (NYSE: PHM), Ryland (NYSE: RYL), Toll Brothers (NYSE: TOL), KB Homes (NYSE: KBH) and Lennar (NYSE: LEN)

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Bernanke Still on Housing Watch

Of the 250+ industry groups that Zacks tracks, Building-Residential/Commercial currently has a very weak Industry Rank of 235. The Zacks Industry Rank rating system drills down deep for very granular classifications of companies.

And it is based very simply on the average, un-weighted Zacks Rank of the individual stocks within a group so as to capture the same effect of earnings estimate revisions. In short, the Industry Rank is derived from the strength of the stocks within the group.

For instance, if an industry has 10 companies in it with an average rank of 2.5, it can be likened to a Zacks Rank of between 2 and 3. But more importantly, it must now compete with the other 250+ industry groups on relative performance.

The Zacks Industry Rank is best used by focusing on the top third of groups as "green light" industries you want to look for opportunities in, the middle third as "yellow light" groups warranting caution, and the bottom third as flashing a "red light" and signaling to stay away.

The Building-Residential/Construction group currently has 16 stocks within it, including Pulte (NYSE: PHM), Ryland (NYSE: RYL), and Toll Brothers (NYSE: TOL) who all are Zacks #3 Rank (Hold) stocks. KB Homes (NYSE: KBH) and Lennar (NYSE: LEN) are Zacks #4 Rank (Sell) stocks in this group.

Combined with the other 10 names in this group, the average Zacks Rank comes out to 3.5, putting it well in the bottom third of all groups with an Industry Rank of 235. The main take away here is that Homebuilder analysts are still not optimistic about an earnings recovery for these companies. And if the builders can't make money, it confirms housing is still soft and likely to continue to impact other areas of the economy.

Going Beyond the Builders

Because the Zack Industry Rank just takes an average of the stocks within a group, it can be prone to highlighting extremes that are useful and some that should be ignored. For example, an industry group with only 2 or 3 stocks in it could score very high or very low as an industry based on the individual companies Zacks Rank.

What's significant is when an industry group has a large number of names as this one does. In that way, its industry rank is telling you something significant not only about those companies, but about their type of business as a group.

Beyond that, if you see similar industry groups also clustered in the same third, you have a meaningful trend to describe the larger industry or sector. In the case of housing and construction, Wood products, Cement and Aggregates, and Miscellaneous Building products are all in the bottom third of industries as well.

Until one or two of these four groups moves up into the middle third of industries, housing is still on thin ice. And that means the economy has structural risks that Bernanke is focused on.

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