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Analyst Picks Outperforming Housing Stocks

Homebuilder Toll Brothers said its fiscal second-quarter profit fell sharply from the year-ago period. Yet April new-home sales topped estimates, jumping 16.2%. Nishu Sood, sector analyst at Deutsche Bank, joined "Squawk on the Street" to make sense of the news -- and offer ways to play the housing market.

Sood told CNBC's Erin Burnett that the shape of housing depends on which element you look at: He believes that construction activity (and its accompanying impact on construction jobs) has probably passed through the "worst" of its volume decreases, though the subsector's return may be slow.

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LEN
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TOL
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But he said that the "main story this year" will be a continued slide in home prices -- and its impact on consumer spending is a "significant worry" for the second half of fiscal 2007.

However, Sood gives "buy" ratings to two homebuilders: Centex and Lennar. He said the firms' shares "rally in anticipation of good news quite a few months out." And the analyst notes that, however murky the second-half outlook may be, "certain builders" will outperform their peers, thanks to fortunate geographic positioning and smart pricing.

Analyst disclosure: Toll Brothers is an investment banking client of Deutsche Bank, which holds a significant amount of the company's stock.

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