Lennar (LEN  ) surged 14% following its better than expected Q4 earnings report. The homebuilder topped analysts' expectations on the top and bottom-line by a significant margin. It also gave positive comments about the strength of the housing market in the company's conference call which contributed to the buying. The report was so positive that it spilled over into gains for other homebuilders.

Inside the Numbers

In Q4, Lennar reported earnings per share of $3.20. However, this included gains from its investment in OpenDoor (OPEN  ) in which the company had invested in 2018. On a pure operating basis, Lennar's earnings came in at $2.04 per share which beat expectations of $1.74 per share. Revenue came in at $5.33 billion, while analysts were looking for $5.13 billion.

Like OpenDoor, Lennar has made many strategic investments in upstart tech companies including SunStreet, Hippo Home, and Doma. And, many are expected to go public in the coming year. In total, the company estimates a gain of $1 billion due to these investments. For investors, it's a positive indication that the company's underlying business is improving, while its long-shot bets are also generating value.

By many measures, the strong earnings report and the bullish reaction were puzzling. First, the company has a record of beating earnings expectations for nine straight quarters with revenue beats in seven out of the nine. Second, there's been considerable strength in housing data especially in more intermediate-term indicators like lumber prices, low housing supply, and decent affordability. Additionally, the improving economy should be another catalyst.

Another perspective is that analysts have been furiously raising earnings estimates over the past year. 2022 estimates have been sharply increased from $6 in EPS to $11.50, and 2022 estimates were also increased from $5 in EPS to $10.50.

Stock Price Outlook

What's interesting is that housing stocks have underperformed the market since October. One factor is that some believed that the housing market's strength was a short-term effect of the pandemic. The second is that many are concerned that increases in long-term rates would lead to higher mortgage rates which could undercut demand. So far, this hasn't happened despite the 30Y Treasury yield going from 1% to 2.4%.

Lennar is considered the highest-quality homebuilder by many due to its 25% margins which are the highest among the major builders. Certainly, the cost of building a home is increasing due to rising commodity prices, but the company is in a position to pass them off to customers given strong demand.