A new bubble for homebuilding stocks?
Major homebuilders have soared since early October, and some analysts say there's no real justification for the rise.
A foreclosure glut is still dragging the sector down. The National Association of Realtors just said the market downturn was worse than it thought. Freddie Mac's chief economist is predicting "another bumpy ride" for 2012.
But shares of D.R. Horton (DHI) were up nearly 50% this week from early October. Toll Brothers (TOL) was up more than 45% in that time. Lennar (LEN) was up more than 50%.
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It's nice to see investors so optimistic about the spring home-selling season, but that kind of share price growth is just too much. And analysts are jumping in with the downgrades, taking homebuilding stocks down a notch or two.
Let's start with D.R. Horton, which makes homes between 1,000 and 4,000 square feet. It only closed 21,000 homes last year, and its stock price was approaching $13 earlier this week.
Stifel Nicolaus hit it with a "sell" rating Wednesday, placing an estimate of $10 on the shares. FBN Securities previously downgraded to "sector perform." But two other analyst firms were a little more optimistic. Barclays went with an "overweight" earlier this month, and Raymond James upgraded to "outperform."
Shares of D.R. Horton fell 3% Wednesday to $11.69 in afternoon trading.
Toll Brothers, which builds luxury homes and other properties, also got a "sell" from Stifel Nicolaus, with analysts saying the stock has recently approached multi-year highs. The analysts added that they didn't see anything on the horizon that will boost shares further.
Toll Brothers had jumped from $13.75 in early October to $21.30 on Dec. 6. The analysts said investors have priced an unrealistically fast housing recovery into the stock, according to the Associated Press.
A KeyBanc analyst downgraded Lennar and Toll Brothers on Monday. Lennar focuses on building homes for first-time and move-up buyers, and analyst Kenneth Zener dropped his rating to "hold."
"We think optimism tied to the seemingly perennial 'spring trade' and positive housing data is unwarranted with credit cycle fundamentals (foreclosure overhang and weak job growth) set to persist longer than most currently think," Zener wrote, according to Investor's Business Daily.
Lennar has risen from below $13 in early October to close to $20 this week.
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These companies won't soar like other plays in the sector, but they make for great income sources.
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