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Jim Weiler, of Jim Weiler Construction, comes down off a ladder while working on a new home construction in LaPorte, IN as sunlight filtering through floor trusses create a basement full of shapes on Oct. 14, 2011. (Bob Wellinski/AP/Bob Wellinski/AP)
Jim Weiler, of Jim Weiler Construction, comes down off a ladder while working on a new home construction in LaPorte, IN as sunlight filtering through floor trusses create a basement full of shapes on Oct. 14, 2011. (Bob Wellinski/AP/Bob Wellinski/AP)

Analyst sees more gains ahead for U.S. homebuilding stocks Add to ...

U.S. homebuilding stocks are fascinating for a couple of reasons. Yes, there is the thrill of seeing this once-beaten up sector come back to life. The S&P 500 homebuilding index, consisting of PulteGroup Inc., Lennar Corp. and DR Horton Inc., has risen 64.5 per cent in 2012, leading all 154 industry groups within the S&P 500.

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But the stocks are also fascinating because of what’s coming: Is all the good news about a U.S. housing recovery already built into the share prices?

You can sympathize with the cautious view. While the share price gains have been extraordinary this year, most of the gains occurred in the first half of the year. So far in the third quarter – admittedly only about six weeks old – the gains have slowed down: Homebuilding stocks have risen a relatively paltry 5.7 per cent. That barely beats the 3 per cent gain for the S&P 500.

Barron’s Stocks To Watch Today has a post on what JPMorgan’s Michael Rehaut is saying about the sector: He believes there are plenty more gains ahead, based on a calculation that homebuilding stocks have rebounded an average of 271 per cent following four downturns over the past 30 years. So far during this rebound, homebuilding stocks have risen 152 per cent.

There is more than a technical argument here, though. Via Barron’s, Mr. Rehaut says in a note:

“While household formation, the core demand driver of housing starts, has begun to improve in 2012, greater gains still lie ahead, in our view, which in turn is poised to drive material incremental improvement in demand from current levels. Specifically, while increasing to roughly 800K vs. 660K in 2011, we note that not only does household formation remain 32 per cent below its 30-year average of 1.2 million, but also well below its above trend rebound 2-3 years after the prior three recessions, when levels of 1.6-2.0 million were reached.”

The analyst believes there is an average 22 per cent upside for PulteHomes, Lennar, KB Home and Ryland Group Inc. However, he cut his recommendation on Toll Brothers Inc. to “underweight” from “overweight” based on what he sees as a high valuation.

 
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