February 28, 2010 in Business

Home-builder stocks rally looks overdone, analyst warns

John Spence MarketWatch

BOSTON – Home-building stocks have burst out of the gate in 2010 and are outperforming the market by a wide margin on hopes housing is recovering, but Oppenheimer & Co.’s chief investment strategist warned investors not to jump on the bandwagon.

“We are not convinced that the group’s recent strength is a signal of things to come and would caution investors against adding exposure to home builders,” said Oppenheimer’s Brian Belski in a research note Monday.

The iShares Dow Jones U.S. Home Construction Index Fund, an exchange-traded fund benchmarked to housing stocks, was up 10.5 percent for the year-to-date period that ended Feb. 19. The S&P 500 index was basically flat for the period.

Some key housing metrics such as home prices and building permits have improved in recent months, but the performance of builder stocks “appears stretched” and valuations “do not look inexpensive,” Belski wrote.

The sector has seen multiple rallies fizzle over the past year when the stocks got ahead of themselves, which should serve as a warning sign to investors “who are attempting to bottom-fish the home builders or are enthused about the recent upside,” he said.

The industry “is not expected to return to profitability any time soon,” the strategist added. “In fact, most analysts expect home builders to continue to post losses through 2010, which we believe will ultimately weigh on the group’s performance.”

Some builders have reported a fourth-quarter profit, but tax benefits have been a key driver and revenue continues to fall in many cases. Industry headwinds include rising foreclosures, stubbornly high unemployment and expectations that mortgage rates will rise.

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