UBS Says Homebuilders Are Frothy: Only Four Stocks Are Buys Now

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The incredible pessimism in the homebuilding industry in the late spring led to a total reverse of ground in June, and since the end of May the top homebuilding stocks have risen a very strong 8%. There was some very positive data and commentary from two of the top names that helped to push the solid gains. Interest rates falling back, especially on the variable rate mortgages, didn’t hurt either.

In a new research report, UBS stays relatively positive on the industry, but the analysts also have lowered the number of stocks rated Buy in their coverage to just four. They are keeping their eyes on the three specific questions:

  1. Is credit availability finally easing?
  2. How are the builders dealing with the overall aspects of their land purchases needed for new construction?
  3. Will the selling season extend longer due to the vicious winter weather this year that delayed the start of the traditional buying period?

The UBS team has good reasons to be concerned. Thursday’s housing starts report was horrible. Housing starts fell 9.3% in June from a downwardly revised 985,000 and from just over a million in May to 893,000. In addition, construction levels for new single-family homes were at the lowest point since 569,000 homes were started in November 2012.

While still cautiously optimistic, the team at UBS has narrowed the stocks rated Buy to four of the top names in the industry, while keeping a rating of Neutral on the rest. Here are the four UBS homebuilder stocks to buy.

Beazer Homes USA Inc. (NYSE: BZH) builds quality single-family homes in 16 states and is one of the 10 largest homebuilders in the country. The company’s homes are designed to appeal to homeowners at various price points across various demographic segments and are generally offered for sale in advance of their construction. By focusing on the high-growth states, the company has consistently managed to match Wall Street estimates. The UBS price target for the stock is $28. The Thomson/First Call consensus target is at $23.50. Beazer shares closed Wednesday at $19.57.

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