Recovery Watch: Homebuilders Seasaw
NEW YORK(
) -- Like the housing recovery, homebuilder stocks are on a bit of a rollercoaster.
Shares of the sector are in the red Monday afternoon, after rallying the end of of last week, as investors fear the housing turnaround won't be fast and immediate.
Lennar
(LEN) - Get Report
reported a bigger-than-expected loss in its third quarter
on Monday, and during a conference call Standard & Poor's Rating Services said there outlook for the sector is still predominantly negative.
As a result, shares of Lennar fell 3% to $16.02,
KB Home
(KBH) - Get Report
was off 2% to $19.74,
Pulte Homes
(PHM) - Get Report
dropped 1% to $12.54, and
Toll Brothers
(TOL) - Get Report
fell 2% to $21.83.
Wall Street is also fearful of the looming end of the $8,000 tax break for new home owners, which is set to expire in November. Some analysts believe the rebate has artificially inflated growth in the sector, and that the recovery will come to an abrupt stop once it expires.
But this pessimism from the market follows on the heels of some good news within the sector.
Last week, J.P. Morgan turned positive on the housing market. Analyst Michael Rehaut said while the housing recovery will most certainly not walk a straight path over the coming years, the sector will continue to recover and drive further upside to the current rally in homebuilder stocks.
Rehaut says supply appears to be more manageable, while demand has begun to stabilize and even slowly re-emerge. "In such an environment, we believe the builders will once again demonstrate positive order growth -- historically a powerful positive catalyst -- and home-price declines will near their end, resulting in the abatement of impairment charges," he wrote in a note.
As a result, Rehaut upgraded Toll Brothers and KB Home to overweight. He already had an overweight rating on Lennar.
Still, he downgraded
MDC
(MDC) - Get Report
to underweight, saying its low leverage should drive underperformance during an upturn. Shares of the company fell 1.5% to $37.53 this morning.
And data within the sector continues to improve, with
housing starts up 1.5% in August
and new homes sales are up 10%.
While Standard & Poor's retains its negative outlook, the building products and homebuilding teams called out a few companies that are poised for a turnaround.
Standard Pacific
(SPF)
posted especially strong gross margins and
MI Homes
(MHO) - Get Report
is leading the way when its comes to new orders.
Toll Brothers is also better positioned than some of its peers to return to profitability in the near future. If this happens, Standard & Poor's says it could move its rating to stable.
-- Reported by Jeanine Poggi in New York
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