Bulletin
Investor Alert

London Markets Open in:

The Ratings Game Archives | Email alerts

Sept. 20, 2022, 8:19 a.m. EDT

Time to buy home builder stocks, as ‘early pain’ equals ‘early gain,’ analyst says

new
Watchlist Relevance
LEARN MORE

Want to see how this story relates to your watchlist?

Just add items to create a watchlist now:

  • X
    iShares U.S. Home Construction ETF (ITB)
  • X
    S&P 500 Index (SPX)
  • X
    Lennar Corp. Cl A (LEN)

or Cancel Already have a watchlist? Log In

By Tomi Kilgore

Shares of home builders traded broadly higher Monday, after KeyBanc Capital analyst Kenneth Zener flipped to bullish on the sector, saying his previous “Wall of Worry” bearish thesis has played out, making it a good time to start buying.

Although Zener believes negative housing market fundamentals , such as declining affordability and slowing demand, fueled by rising interest rates , are expected to continue, he also said history suggests getting in the sector early, and suffering some initial pain, tends to pay off in the long run.

The iShares U.S. Home Construction exchange-traded fund /zigman2/quotes/203468436/composite ITB +1.35% climbed 2.3%, while the S&P 500 index /zigman2/quotes/210599714/realtime SPX -0.09% tacked on 0.7%.

As part of his new bullish stance on the group, Zener upgraded multiple companies, and their stocks all traded higher Monday:

  • Lennar Corp. /zigman2/quotes/202536373/composite LEN +0.38% doubled upgraded to overweight from underweight.

  • D.R. Horton Inc. /zigman2/quotes/202032328/composite DHI +1.11% upgraded to overweight from sector weight.

  • Meritage Homes Corp. /zigman2/quotes/209069331/composite MTH +0.74% upgraded to overweight from sector weight.

  • PulteGroup Inc. /zigman2/quotes/201694804/composite PHM +0.83% upgraded to overweight from sector weight.

  • TopBuild Corp. /zigman2/quotes/201668256/composite BLD +2.54% upgraded to overweight from sector weight.

  • KB Home /zigman2/quotes/206220859/composite KBH +1.98% upgraded to sector weight from underweight.

  • Toll Brothers Inc. /zigman2/quotes/201912487/composite TOL +0.92% upgraded to sector weight from underweight.

Both Lennar and KB Home are scheduled to report third-quarter results on Wednesday, after the closing bell.

The new stance reversed the bearish call he made on the sector in mid-January, when Zener said home builders faced a “Wall of Worry (W.O.W.),” as historically high inflation superseded housing fundamentals, which at the time were still “favorable.”

The home construction ETF had tumbled 24.6% since the January downgrade through Friday, while the S&P 500 fell 14.8% over the same time.

“Since our [January] downgrade (W.O.W.), fundamentals are weaker, credit policy is tighter and builder valuations are lower, so why pivot now?” Zener wrote in a note to clients. “The essence of our call lies between Jesse Livermore (‘There’s a time to go long, a time to go short and a time to go fishing.’) and Wayne Gretzky (‘Skate to where the puck is going, not to where it is.’).”

Jessie Livermore was a legendary stock trader who was said to have amassed a fortune in the early 20th century, and lost it more than once, and whose trading principles are still followed by many on Wall Street. And Gretzky is a “hall of Fame hockey player who holds the National Hockey League scoring record, by far.

Zener said data going back to 1963 shows that home builder stocks fall an average of 41% on aggregate, versus a 28% drop in the S&P 500, then rise 194%, vs. a 141% gains for the S&P 500, in each bear-bull market cycle.

And from the Dec. 10, 2021 record close of $83.04 for the home construction ETF to the June 16, 2022, two-year closing low of $49.13, the ETF fell 40.8%, while the S&P 500 fell 23.6% from its Jan. 3 record close to its June closing low.

Basically, Zener said that while he’s not trying to “time a bottom,” his research suggests that at current prices, “relative risk to return is compelling” for investors.

“Early pain = early gain,” Zener wrote.

/zigman2/quotes/203468436/composite
US : U.S.: Cboe BZX
$ 61.70
+0.82 +1.35%
Volume: 2.30M
Dec. 1, 2022 4:00p
loading...
/zigman2/quotes/210599714/realtime
US : S&P US
4,076.57
-3.54 -0.09%
Volume: 0.00
Dec. 1, 2022 5:17p
loading...
/zigman2/quotes/202536373/composite
US : U.S.: NYSE
$ 88.16
+0.33 +0.38%
Volume: 1.55M
Dec. 1, 2022 4:00p
P/E Ratio
5.83
Dividend Yield
1.70%
Market Cap
$25.02 billion
Rev. per Employee
$3.01M
loading...
/zigman2/quotes/202032328/composite
US : U.S.: NYSE
$ 86.70
+0.95 +1.11%
Volume: 2.89M
Dec. 1, 2022 4:00p
P/E Ratio
5.24
Dividend Yield
1.15%
Market Cap
$29.61 billion
Rev. per Employee
$2.53M
loading...
/zigman2/quotes/209069331/composite
US : U.S.: NYSE
$ 87.05
+0.64 +0.74%
Volume: 219,067
Dec. 1, 2022 4:00p
P/E Ratio
3.36
Dividend Yield
N/A
Market Cap
$3.16 billion
Rev. per Employee
$3.27M
loading...
/zigman2/quotes/201694804/composite
US : U.S.: NYSE
$ 45.15
+0.37 +0.83%
Volume: 2.29M
Dec. 1, 2022 4:03p
P/E Ratio
4.58
Dividend Yield
1.42%
Market Cap
$10.20 billion
Rev. per Employee
$2.49M
loading...
/zigman2/quotes/201668256/composite
US : U.S.: NYSE
$ 158.00
+3.92 +2.54%
Volume: 369,799
Dec. 1, 2022 4:00p
P/E Ratio
10.53
Dividend Yield
N/A
Market Cap
$4.93 billion
Rev. per Employee
$369,645
loading...
/zigman2/quotes/206220859/composite
US : U.S.: NYSE
$ 32.01
+0.62 +1.98%
Volume: 1.53M
Dec. 1, 2022 4:00p
P/E Ratio
3.74
Dividend Yield
1.87%
Market Cap
$2.69 billion
Rev. per Employee
$2.96M
loading...
/zigman2/quotes/201912487/composite
US : U.S.: NYSE
$ 48.35
+0.44 +0.92%
Volume: 1.60M
Dec. 1, 2022 4:00p
P/E Ratio
5.72
Dividend Yield
1.65%
Market Cap
$5.43 billion
Rev. per Employee
$1.88M
loading...

This Story has 0 Comments
Be the first to comment
More News In
Industries

Story Conversation

Commenting FAQs »

Partner Center

Link to MarketWatch's Slice.