Sterne Agee Pounds Table as Home Builders Continue to Show Strength (TOL, PHM, MTH, DHI, BZH, HD, LOW, MTG, GNW, WFC)

Lee Jackson

The home building industry may have been left for dead after the mortgage debacle and recession of 2008, but it continues to help lead markets higher and heal a very anemic economy. Because of the vast array of products, components and material needed for the construction of single family and multifamily homes, multiple segments of the American economy are benefiting. In research reports out today, regional brokerage firm Sterne Agee joins a growing list of Wall St. firms that are bullish on the home builders.

Acknowledging today in their initiation of coverage on the sector that all builders are not created equal, the team at Sterne Agee starts four names with Buy ratings, two at Neutral and upscale home builder Toll Brothers (NYSE: TOL) at Underperform. They cite two specific areas of concern in their coverage about the home building industry as a whole: the potential for mortgage rates to rise from current historic lows and the very strict mortgage underwriting standards lenders are using. The following are the home building stocks to buy according to Sterne Agee.

PulteGroup Inc. (NYSE: PHM) has a Sterne Agee price target of $24, the Thomson/First Call consensus target of $23.

Meritage Homes Corp. (NYSE: MTH) is a California and Texas builder, initiated today with a price target of $49. The Wall St. estimate is $47.

D.R. Horton Inc. (NYSE: DHI) makes the buy list and has a $29 price target. The Wall St. consensus estimate is $25.50.

Beazer Homes USA Inc. (NYSE: BZH), with operations in 16 states, fills out the list at Sterne Agee, with a $21 price target. The consensus estimate is $15. This is a contrarian call to say the least.

The economic boost because of the wide range of products and material needed for construction is having a definite trickle down effect. Suppliers and home improvement companies are big beneficiaries of the building boom. The Home Depot (NYSE: HD) and competitor Lowe’s Companies Inc. (NYSE: LOW) are at the top of most Wall St. stocks-to-buy lists, and both are trading near 52-week highs.

They are not the only companies to benefit from the resurgence in home building. The mortgage insurance industry has seen a strong uptick in business. Once left for dead, both MGIC Investment Corp (NYSE: MTG) and Genworth Financial Inc. (NYSE: GNW) have fought their way back. In fact, many top “low price” stock lists tout both of these names.

In addition, the damage in the mortgage industry made many money center banks flee the business of providing and servicing mortgages. This has opened the door for Wells Fargo & Co. (NYSE: WFC) to become a leading provider of home loans, often buying loans from builders in less than 30 days from closing.

Sector leadership drives our economy. The home building sector, with its vast need for labor, materials and services, is helping to revive an economy it once helped to drag down. Investors need to stay focused on earning reports from homebuilders. Once things begin to soften, it may be time to exit.