Why Wedbush Is Cautious on Homebuilders in 2020

Wedbush has a cautious view of many homebuilders for 2020, after noting that there will be tougher comps in the second half of the year, while it actually sees the near-term setup as enticing. The firm would maintain current holdings in the homebuilders and look to initiate new positions in names that have pulled back from recent highs.

Excluding a sharp increase in mortgage rates due to unforeseen events, the only headwind Wedbush expects to see is more difficult year-over-year order growth comparisons for builders in the June 2020 quarter.

Heading into 2020, the setup for builders appears positive to Wedbush. The Federal Reserve seems to be on the sidelines, job growth (the single most important leading indicator for housing demand in Wedbush’s view) has flexed higher and weather conditions generally have been favorable over the past six months.

From a stock price performance, 2019 has been very similar to 2017, when the homebuilder ETF iShares U.S. Home Construction (ITB) had an annual return of 58%, versus a 19% return for the S&P 500. So far in 2019, the ITB is up 52%, compared with a 24% return for the S&P 500 during the same period.

Wedbush went on to say:

Our big question now is what reinvigorates investor interest in the group after 2019’s performance. We believe the answer is either more M&A between public builders and/or a consistent theme of steady but not aggressive price increases when builders start reporting earnings in January 2020.

The boutique brokerage has positive ratings for the following homebuilders:

  • Century Communities Inc. (NYSE: CCS), an Outperform rating with a $34 target.
  • Lennar Corp. (NYSE: LEN), an Outperform rating with a $72 price target.
  • Beazer Homes USA Inc. (NYSE: BZH), an Outperform rating and a $17 price target.
  • Taylor Morrison Home Corp. (NYSE: TMHC), an Outperform rating and a $33 price target.