Compass Point Research Offers 'The Home Builder Hope Trade'

Wilkes Graham of Compass Point Research on Monday published a report titled ‘The Home Builder Hope Trade, 2014-2015 Edition.'

Over the last 16 years, the homebuilders have outperformed the overall S&P 500 index between November 21 and February 6 by an average of 16 percent. Graham expects this "Hope Trade" to continue in 2014 given investor sentiments for loosening credit in 2015 and beyond.

In the note, Graham raises his price target on seven of the nine hom builders under his coverage by approximately 7 percent given lower required return on investment estimates. In addition, the analyst upgraded three separate names in the space.

"Trade. Absent raising earnings estimates to account for positive fundamentals we haven't yet seen, lowering the required return on builders (or raising P/Es) is our best tool for accounting for sentiment shifts such as the Hope Trade,” Graham wrote. “We are lowering our required ROIs across our home builder coverage universe by 70 bps (on average), with the largest downward shifts (-150 bps) at the lower end of the market, and slight tweaks (0-50 bps) for the remaining mid/high end builders."

Rating Summary

Shares of Standard Pacific SPF were reiterated as Buy rated with a price target raised to $10.50 from a previous $10.

Shares of Beazer Homes USA BZH were reiterated as Buy rated with a price target raised to $22.50 from a previous $21.50.

Shares of Ryland Group RYL were reiterated as Buy rated with a price target raised to $44.50 from a previous $42.

Shares of DR Horton DHI were upgraded to Buy from Neutral with a price target raised to $26 from a previous $22.

Shares of Hovnanian Enterprises HOV were upgraded to Buy from Neutral with a price target maintained at $4.50.

Shares of Toll Brothers TOL were reiterated as Neutral rated with a price target maintained at $35.

Shares of PulteGroup PHM were reiterated as Neutral rated with a price target raised to $19 from a previous $18.

Shares of KB Home KBH were upgraded to Neutral from Sell with a price target raised to $15.50 from a previous $13.50.

Shares of Lennar LEN were reiterated as Neutral rated with a price target raised to $40 from a previous $38.