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

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.

ALSO READ: Merrill Lynch Very Bullish on Credit Card Stocks as Growth Surges
Hovnanian Enterprises Inc. (NYSE: HOV) is a small cap name that could provide some big gains for investors. The stock has struggled somewhat compared to the other top names in the industry. But recently some large option buying in the stock has garnered attention. While the company posted a small loss in its fiscal second quarter, it did see strong growth in revenue.

Hovnanian also saw significant rise to the value of its backlog of contracts, which rose from $865 million to $1.05 billion, a gain of 21% year-over-year. In total, the homes in backlog increased to nearly 2,800, a gain of 13.6%. The UBS price target for the stock is $6, while the consensus target is $4.82. Hovnanian closed Wednesday at $4.60.

PulteGroup Inc. (NYSE: PHM) is the top homebuilding picks at UBS, and the stock could be poised for a very strong second half of 2014. The company ranks as one of America’s largest homebuilding companies, with operations in approximately 50 markets throughout the country.

Through its brand portfolio that includes Centex, Pulte Homes, Del Webb and DiVosta Homes, PulteGroup has become one of the industry’s most versatile homebuilders, able to meet the needs of multiple buyer groups. This helps when one segment of buyers slows down. Investors are paid a 1% dividend. The UBS price target is $25, and the consensus figure is $22.03. Shares closed trading Wednesday at $19.96.

ALSO READ: J.P. Morgan’s Top Gold Stock Picks for Earnings Surprises

Ryland Group Inc. (NYSE: RYL) is a homebuilder and a mortgage-finance company. It six operating business units operate in four geographically determined homebuilding regions, plus financial services and corporate. Pent-up demand from young adults is one of the key reasons to own the stock. Their price points are designed to attract the first- and second-time buyer, and that is a large segment coming in to the current market. The stock pays a small 0.3% dividend. UBS has a $52.50 price target, and the consensus is $47.08. Ryland closed Wednesday at $39.39.

The big money that was made in the homebuilding stocks after the housing collapse and the great recession is over. Investors looking for solid portfolio additions in what has become a pricey market may want to look at these top stocks to buy. They could bring good gains for the rest of the year and lack the downside in some of the stocks that have traded ahead of themselves.

ALSO READ: Eight Housing Markets at All-Time Highs

Sponsored: Attention Savvy Investors: Speak to 3 Financial Experts – FREE

Ever wanted an extra set of eyes on an investment you’re considering? Now you can speak with up to 3 financial experts in your area for FREE. By simply
clicking here
you can begin to match with financial professionals who can help guide you through the financial decisions you’re making. And the best part? The first conversation with them is free.

Click here
to match with up to 3 financial pros who would be excited to help you make financial decisions.

Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.