Did Goldman spook homebuilding investors?
The company's upgrade of the sector coincided with the year's steepest market drop.
In March, Goldman Sachs (GS) issued a report to clients calling stocks an once-in-a-lifetime opportunity. "The prospects for future returns in equities relative to bonds are as good as they have been in a generation," wrote Peter Oppenheimer, the firm's chief global equities strategist. Afterward, the Dow Jones Industrial Average and S&P 500 declined significantly, causing investors to be more cautious than ever of Goldman's most recent recommendation on homebuilders.
After the company's first-quarter housing survey, Goldman recommended clients buy high-end homebuilders Toll Brothers (TOL) and PulteGroup, Inc. (PHM). The survey showed that 63 percent of consumers expect home prices to be stable or positive, compared with 58 percent six months earlier. Further, 83 percent of respondents with an income of $120,000 or more expect home prices to be stable or positive, compared with 75 percent six months earlier.
Homebuilders have outperformed the general market year to date, but Goldman's upgrade came on the steepest one-day decline in stocks this year. Instead of receiving a boost on the upgrade, shares of Toll Brothers and PulteGroup fell 4.7 percent and 6.5 percent, respectively. Lennar Corp. (LEN), the top performer in homebuilders for the year, dropped more than 7 percent. Instead of rushing to buy homebuilder stocks, investors appear to be taking Goldman's latest call as a reason to book profits. After strong gains in the first quarter and growing uncertainties in the macro picture, who can blame them?
Aside from Goldman's past recommendations, investors are struggling to place confidence in housing stocks as unemployment remains high. The latest unemployment report showed that only 120,000 jobs were added in March, well below estimates north of 200,000.
BMO Capital Markets explained, "It is tough to argue that an increase in U.S. employment is negative but the details make this report disappointing. Also, it doesn't help that there were such high expectations ahead of the release. And, the U.S. economy has still lost 5.3 million jobs since the economy peaked back in December 2007. So there's a long way to go before we're 'normal.' But progress is slowly being made," according to Reuters.
Eric McWhinnie is an editor at Wall St. Cheat Sheet. As of this writing, he did not own a position in any of the aforementioned stocks.
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The solid report comes a month after the retailer closed all of its Canadian operations.
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