The Ratings Game: Home builders are a buy again, says Wedbush

The economy is still strong enough and there’s intrinsic demand for housing, the analysts wrote. Read More...

Lennar Corp. signage is displayed outside a sales office at the Creeks of Legacy development in Prosper, Texas.

As low mortgage rates bolster demand and the economy remains supportive, homebuilder stocks are now the preferred proxy for housing market demand for analysts at Wedbush, according to a note published Thursday.

The Wedbush team upgraded Lennar LEN, +0.89% LEN.B, +1.04% to outperform on the same day, and maintained an outperform rating on Taylor Morrison Home Corporation TMHC, +0.58% , Beazer Homes USA Inc. BZH, +1.73% , and Century Communities, Inc. CCS, +0.18%

That’s a shift from a prior call, in which lumber distributors were their preferred way of playing housing, but with lumber price volatility spiking and housing fundamentals looking healthier, “investors should be willing to pay a higher multiple for homebuilder earnings,” the analysts wrote.

They pointed to job market indicators other than the headline nonfarm payrolls data, which fell short of expectations last month. One of their favorite metrics, they said, is the 3-month quits rate “which has grown at a mid-single-digit percentage over the past few months. We think the continued growth in this index is a useful sign of consumer confidence.”

Read: New-home sales slump 7% in April after reaching the best level of the cycle

Mortgage rates remain low, and together with slowing price growth, will help more people afford more home.

And the market seems to have pushed through the weakness in new-home sales in 2018, especially in California, which represents about 10% of the communities of the companies they cover, the analysts said. “Now that the worst seems to be over, the industry should benefit from more volume and higher average selling prices for that state.”

Wedbush has a $62 price target on Lennar shares. That would represent 17% upside for the company, which popped nearly 2% after the upgrade Thursday. Builder stocks have benefitted this year from sentiments like the ones the Wedbush analysts expressed: shares of D. R. Horton, Inc DHI, +1.10% , are up 32% for the year to date, while Meritage Homes Corporation MTH, +0.73% shares are up more than 43% in that period.