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Strategies & Market Trends : The Residential Real Estate Crash Index

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From: ChanceIs10/10/2006 7:56:07 PM
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Home Builders 3rd-Biggest Gainers On Upgrades,Inventory Talk

October 10, 2006 2:37 p.m.

By Janet Morrissey

NEW YORK (Dow Jones)--Home builders were the third-biggest gainers among the 100 sectors of the Dow Jones indexes Tuesday as the market appeared to react to an analyst upgrade and talk that the sector's inventory glut may finally be getting smaller.

The Home Construction index rose 3.4% on average Tuesday.

Builders were up across the board, with Toll Brothers Inc. (TOL), Standard Pacific Corp. (SPF) and D.R. Horton Inc. (DHI) enjoying the biggest advances, as their stocks recently were up 4.9%, 5.7% and 4.3%, respectively. The sector appeared to be responding to a decision by JP Morgan analyst Michael Rehaut to upgrade Toll to neutral from underweight, raise Standard Pacific to overweight from neutral, and boost D.R. Horton to overweight from neutral. Rehaut's upgrades were based primarily on valuation and his belief the industry will slowly improve over the next few quarters.

Rehaut's statement comes even though two more builders posted sharp year-over-year declines Tuesday. D.R. Horton said orders fell 25% in its fiscal fourth quarter, while M/I Homes Inc. (MHO) posted a 51% decline in its third quarter.

At the same time, there is talk that the inventory buildup that has plagued the industry for much of the past year may have peaked. UBS analyst Margaret Whelan said 51 of the 59 markets she tracks across the country showed housing inventory dropped slightly last week from peak levels.

JMP analyst Alex Barron attributed the rally to the upgrade and inventory talk.

"People think all the bad news is priced into the stocks, and so people are buying into the expectation that the market is going to recover soon - even though there are no signs in the fundamentals that that is the case," Barron said.

Investors are trying to get into the sector ahead of the recovery. "You don't wait until you see the good news to buy them - you buy them at what you consider the worst of the news," he said.

However, Barron believes the rally is premature.

"I just believe there's more bad news to come that's even worse than what we've seen so far," he said.

Other builders rising more than 3% on Tuesday include KB Home (KBH), Hovnanian Enterprises Inc. (HOV), M.D.C. Holdings Inc. (MDC), Meritage Homes Corp. (MTH), and Beazer Homes USA (BZH).

Personal Comment: Mr. Barron needs a pay raise. As for Mr. Rehaut and Ms. Whelan.....well..... perhaps they should be made to inhale a chimichanga through their noses. It really is unbelievable what moves the markets.
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