Mizuho Securities analyst Haendel St. Juste downgraded both KB Home (KBH) and PulteGroup (PHM) to "underperform" from "neutral" on concerns that full valuations will make it harder for the homebuilders to outperform, Barron's reported.

St. Juste put a $21 price target on KB Home despite "substantial improvement in gross margins." There's more optimism than there should be and lagging orders paired with a low community count mean limited upside, St. Juste wrote.

Pulte got a $22 price target but the lack of expected margin growth and negative absorption rates suggest Pulte's current valuation is "unjustified," according to St. Juste.

St. Juste's two buy-rated stocks in the homebuilder sector are Lennar Corp (LEN) and Toll Brothers Inc (TOL) .

KB Home and Pulte traded down at midday.

What's Hot On TheStreet

Tesla's Model 3 is born: Tesla (TSLA) CEO Elon Musk tweeted photos of the first Model 3 ever produced, which appears to be black, in the evening on Saturday. The car is going straight to Musk's garage. "Ira Ehrenpreis had rights to 1st car as he was 1st to place a full deposit, but gave those rights to me as my 46th bday present. Tks Ira!," Musk said on Twitter.

Musk has said that production should ramp up quickly with 100 Model 3s produced in August, followed by 1,500 produced in September and up to 20,000 produced per month starting this December.

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