Sterne Agee CRT: 6 Homebuilders To Buy On Weakness

On May 20, Sterne Agee CRT analyst Jay McCanless issued a research note updating homebuilders after this week's conflicting data reports. He named six homebuilders to consider purchasing on any "macro-related weakness" in share prices:

Sterne Agee CRT maintains a Buy rating on these names, and McCanless noted: "All six builders had positive order momentum coming out of the March earnings cycle and reported that April was generally in line to better than the order pace from the March quarter."

All six of these builders traded up on Wednesday after the SA CRT note was published, with Ryland and Meritage leading the way up 1.94 and 1.74 percent, respectively. McCanless shared this view on recent market activity: "Recent trading in homebuilder stocks has been characterized by sell-offs on better-than forecast macroeconomic (macro) news and rallies on macro data misses under the assumption that good news will drive the Federal Reserve to raise rates sooner than later."

Notably, Beazer Homes is the only one of the six which is currently trading below FY 2015E book value, with a FY15E P/B of 86 percent.

In addition to noting book value and ratings, the SA CRT chart above shows the FY end for these builders, which can be a source of confusion when trying to compare apples-to-apples.

May Homebuilder Confidence (Released 5/18): "The NAHB (National Association of Home Builders) monthly index of homebuilder confidence (HMI) declined to 54 in May from 56 in April. An HMI reading above 50 indicates a majority of the survey group believes conditions are improving versus declining.

The bright spots in the May data were in the Y/Y comparisons with the main index up 20.0% Y/Y versus May 2014 and Y/Y sentiment gains in the HMI's three sub-categories (present conditions, 6-month outlook, and traffic)." April Housing Starts (Released 5/19): "The seasonally adjusted annual rate (SAAR) of total housing starts increased 20.2% to 1.135 million homes from 944k homes in March. Single family construction clocked in with a 16.7% increase from March to April and multifamily registered a 31.9% gain for the same period."

McCanless noted that: "This is the first time both segments have shown double-digit sequential growth since July 2014." "April's single family gain is another indication of rebounding unit volumes and dovetails with the better-than expected order growth from the most recent round of homebuilder earnings."