Sterne Agee Previews Homebuider Sector Earnings: Exercise Caution

Jay McCanless of Sterne Agee on Wednesday released preview for the Homebuilder sector. Within the report, McCanless holds a generally bullish tone but does recommend investors exercise some caution.“Respect the seasonal trade but exercise caution,” McCanless wrote referring to the yearly seasonal “hope” trade in anticipation of the following spring's selling season. “The catalyst for demand are growing (rent versus buy, employment growth, etc.), but mortgage lenders' risk appetites appear to be growing at a slower rate.”McCanless notes that the market may have already priced in the “disconnect” for certain homebuilder stocks.The analyst expects that average closing prices for homes has risen 10.0 percent year over year in September, slightly above the consensus estimate of 9.7 percent. As such, the analyst estimates that the Homebuilder's group average gross margin expanded by 50 basis points year over year in September to 21.7 percent.Despite positive expectations for September, the analyst cautions the December quarter may prove to be different. Recommended: Compass Point Research Offers 'The Home Builder Hope Trade'“We anticipate this comparison will turn negative in the December quarter if builders' order volumes match our forecasts, but we believe the potentially negative delta could be mitigated by higher-than-expected order growth in the September quarter,” McCanless cautions.McCanless believes investors should maintain exposure to the housing cycle through Buy rated names which include Beazer Homes (NYSE: BZH), D.R Horton (NYSE: DHI), M.D.C Holdings (NYSE: MDC), Meritage Homes (NYSE: MTH), Pultergroup (NYSE: PHM), Ryland Group (NYSE: RYL) and WCI Communities. (NYSE: WCIC)