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Is the Housing Sector Ripe for a Pullback?
9/7/2012 1:30:00 PM
By: David Sterman
If you keep a close eye on the stockmarket and theeconomy , then it's crucial that you tune out the daily noise. There are so many data points we process that give the impression of a long-term trend, even if it's really just a short-term shift.
A few examples come to mind…
The U.S. economy
Foreclosures on the rise
The future of the housing market
Even if you are a believer in a big-time housing rebound for 2013, you still need to tread carefully with these stocks after such strong gains. That's the view of JMP Securities' Peter Martin, who thinks this recent rebound in the housing market is legit: "Over the past two years, the market has experienced several false starts with regard to sustained positive movement in the economy and the housing cycle. However, in our view, this current move appears to have 'real legs' given the breadth and extended timeframe of the spring selling season, velocity in which foreclose homes are being cleared from the market, and current pricing for finished lots."
Yet, even with the fairly positive view, he still says you should brace for a reversal in the housing market. He recently reinitiated coverage of the sector and found few bargains.
Among his pans:
• Beazer Homes (NYSE: BZH ). He foreseesshares falling by half to a $1.50price target . He's concerned that Beazer is likely to keep losing money throughout 2013, and will need to conserve cash, right at a time when flusher rivals can accelerate their long-term landacquisition plans.
• Hovnanian Enterprises (NYSE: HOV ). Martin foresees a strong decline of more than 60% from a recent $3.20 a share, as the company faces a possible cash crunch that lead to the issuance of more shares. As of June 30, Hovnanian had $400 million in cash against $1.6 billion in debt. Projections of continued near-term losses will only weaken thebalance sheet further.
The analyst goes on to suggest that most other homebuilder stocks are fairly valued, but none look like "buy" candidates, except for one stock: Toll Brothers (NYSE: TOL ) , which should see a steady upturn in demand, thanks to its focus on well-heeled home buyers looking to take advantage of current low homemortgage interest rates. He notes that "TOL's integrated operating model and balance sheetoffer greater flexibility than its peers," and he foresees shares trading up nearly 17% from a recent $32.50.
Risks to Consider: As an upside risk, the direction of the housing market depends heavily on employment trends, so if monthly payrolls start growing at a much faster clip than we've seen recently, then these surging housing stocks could keep moving higher.
Action to Take --> Although the U.S. economy doesn't look headed for hard times, it doesn't look to be building a robust head of steam in 2013, either. That's why it's wise to keep expectations in check, and book profits in any sectors that already appear to anticipate better days ahead, as is the case with the housing sector.
David Sterman does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC does not hold positions in any securities mentioned in this article.