The housing data keeps rolling in stronger and stronger for the U.S. economy. What is at issue is whether investors should keep paying up and up for housing stocks. Rather than “Buy low and sell high” we are getting to see a “Buy high, sell higher” call.
Sterne Agee’s Jay McCanless has reviewed this month’s home builders data and he remains positive on the group. He believes that investors should continue buying D.R. Horton Inc. (NYSE: DHI), Ryland Group Inc. (NYSE: RYL) and Meritage Homes Corp. (NYSE: MTH), because he believes the builders’ pricing power will increase in 2013.
McCanless sees competitive housing supply continuing to decline. Another boost comes from inventory shortages likely limiting sales in certain metropolitan areas and acting as a boost for the home builders mentioned.
Our takeaway from this month’s data is to continue buying these three names because the fundamental backdrop remains positive. We believe builders’ pricing power can increase in 2013 as competitive supply comes off the market, and we estimate the risks of upside EPS surprises from pricing power and available inventory outweigh the risks of a downside EPS surprise in the current environment.
D.R. Horton Inc. (NYSE: DHI) is up 0.8%, at $24.67 with a 52-week range of $13.80 to $25.56.
The Ryland Group (NYSE: RYL) is up 1%. at $42.22 against a 52-week range of $17.18 to $43.00.
Meritage Homes Corp. (NYSE: MTH) is up the most of these three home builders, with a gain of 1.3% to $47.97, against a 52-week range of $24.31 to $48.62.