Citi Investment Research cut its outlook on the homebuilding sector Monday, discounting the chance of a rebound in the business any time soon.
Citi analyst Stephen Kim upgraded the sector in early October, basing it on his view that builder stocks had reached their bottom on an analysis of historical trading and pricing.
"However, although the homebuilders subsequently traded roughly in line with the S&P for a while, in just the past two weeks, amid several high-profile instances of severe distress in the financial sector, the group has underperformed the market by more than 10 percent," he wrote.
Kim said two things have made it difficult to identify the lowest point the builder stocks will reach. He pointed to the fact that "the housing cycle's downturn has not coincided with the economic cycle," and noted that the "downturn in the existing home market is lagging far behind the new home market."
Given the recent stock performance, "we are no longer convinced that gauging the degree of bad news is a reliable tactic for forecasting near-term performance in these stocks," he said. "It appears that this time around, there will need to be a modicum of good news before a sustainable rebound in the stocks can take shape."
He suggested that the good news would come in the form of a turnaround in subprime default trends. Under current conditions, Kim said, it will likely be the second half of 2008 before there is "sufficient data" to allow for optimism in the sector.
Kim reduced his ratings to "Hold" from "Buy" on the following homebuilder stocks: Centex Corp., with a price target cut to $22 from $35; D.R. Horton Inc., price target cut to $12 from $17; KB Homes Inc., price target down to $25 from $37; Lennar Corp., price target to $17 from $31; Pulte Homes Inc., target to $12 from $21; Ryland Group Inc., target price to $23 from $36; Standard Pacific Corp., target to $3 from $11.
He cut Meritage Homes Corp. to "Sell," from "Hold," and dropped his price target to $9 from $17.
The analyst kept a "Hold" rating on Toll Brothers Inc., and cut his price target to $19 from $24. He kept "Sell" ratings on: Beazer Homes USA Inc. and cut his price target to $9 from $13; Hovnanian Enterprises Inc., price target cut to $8 from $12; and MDC Holdings Inc., price target to $37 from $44.
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