Homebuilders Cut as Evercore Says the ‘Easy Money Has Been Made’
(Bloomberg) -- For investing in homebuilders, “hope is not a strategy,” Evercore ISI cautions, stepping back from the sector. Analyst Stephen Kim downgraded five different companies, calling an end to the “Hope Trade,” which saw investors buy up stocks in anticipation of robust spring demand.
Kim slashed ratings for D.R. Horton Inc., KB Home, PulteGroup Inc., Toll Brothers Inc., and TRI Pointe Group Inc., saying “the easy money has been made” after he urged investors to take advantage of overly negative sentiment and trough valuations in October.
The mass downgrade comes at the end of a four-month period that saw stocks in Evercore’s Homebuilder Index gain 25 percent even as consensus EPS estimates for the group have declined 16 percent. This seasonal trading window has the greatest track record of success, Kim wrote in a note to clients, noting that market checks, builder commentary, mortgage applications and his firm’s homebuilder survey all point to a slow start to the spring selling season.
A leadership change at the Federal Housing Administration is also a potential risk. Kim notes that FHA Commissioner Brian Montgomery, who was appointed last year, has suggested the agency was looking at scaling back loans to buyers who have debt-to-income ratios above 50 percent, a group that makes up a significant amount of the homebuilders’ volume.
The group of homebuilding stocks in the S&P 1500 fell as much as 1.6 percent Thursday to a two-week intraday low, on pace for a fourth straight decline. Year to date, the sector index remains higher by about 14 percent.
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