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

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.

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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.

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