Horton Hears a Hooray

Single-family homes in suburbia aren't the only thing that D.R. Horton (NYSE:DHI) is building these days. It's also building momentum, now that the company will be replacing Veritas Software (NASDAQ:VRTS) in the S&P 500 Index.

It's an honor, but not much of a surprise. Homebuilding stocks have been on a tear in recent years as soaring real estate prices and consumer demand for fresh homesteads have lifted the sector's prospects. Even the recent wave of pesky rate hikes hasn't held the leading players back.

Horton will have some familiar friends in the popular stock index. Pulte Homes (NYSE:PHM), Centex (NYSE:CTX), and KB Home (NYSE:KBH) are all index components. That might spell bad news for index investors if Horton hops on board just as the homebuilder stocks peak. Sure, four stocks in a pool of 500 won't cause too much damage, but it does seem that investors are starting to tire of real estate stocks.

Let's consider what happened to Horton yesterday. When a stock is added to the S&P 500, it usually trades higher after the announcement. It generally takes days, if not weeks or months, for institutional index fund managers to add shares of the incoming company. However, knowing that there will be an influx of buy orders from money managers in the not-too-distant future is usually enough to send a stock running.

Horton opened yesterday at $37.76, a decent improvement from its Wednesday close of $36.90. However, it closed lower on the day, fetching just $36.88 by the end of Thursday's trading. When a positive development finds that those wanting out are more eager than those buying in, it's probably as good a time as any to worry. Yes, Horton is changing hands for just 10 times trailing earnings, but that number can inflate in a hurry if the real estate bubble pops and earnings deteriorate.

So go ahead and celebrate Horton's addition to the S&P 500. It really is good news. Just make sure that the company has what it takes to keep that favorable momentum going. Even a sturdy house can't stand forever.

More links that will make your house a home:

• Mortgage rates have stabilized in the near term, so you are not nuts if you are thinking about refinancing.
• Builder buddy KB Home had a great party last week, by the way.
• The real estate market could just as easily be headed for a boom as a bust.
• Knock on the door of our remodeled Home Center.

Longtime Fool contributor Rick Munarriz can't believe what his neighbors' houses have been fetching these days, but if he were to cash out, where would he move? He does not own shares in any of the companies mentioned in this story. The Fool has a disclosure policy. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early.