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Homebuilder Stocks Jump on Fannie Mae, Lehman News

Published: Wednesday, 27 Feb 2008 | 3:45 PM ET

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By: Greg Levine
Web Editor

Toll Brothers reported a first-quarter loss Wednesday: the homebuilder announced a huge jump in write-downs on properties it could no longer sell profitably; and its sales fell 23 percent.

So why did the company’s shares [TOL Loading... () ] climb as much as 2.21 percent Wednesday?

Toll Brothers: Investor Toolkit

Toll Brothers – and key sector rivals like KB Home [KBH Loading... () ] and D.R. Horton [DHI Loading... () ] -- can in part thank the Office of Federal Housing Enterprises Oversight, which lifted the portfolio caps on Fannie Mae [FNM Loading... () ] and Freddie Mac [FRE Loading... () ]. The OFHEO’s move will allow the government-backed lenders to hold billions of dollars more in mortgages – potentially revving up home selling and building activity.

Full story: Housing Outlook Brightens, Lifting Builder Stocks

Another positive stimulus: Lehman Brothers analysts issued a research note calling for home-sales trends to strengthen over the next two quarters.

Investor Takeaway

"Attractive investment opportunities do exist in this space. In our view the builders that have been able to generate the most cash flow while also maintaining the healthiest balance sheets are KB Home, Toll Brothers and D.R. Horton. …Currently we prefer companies with healthier and conservative balance sheets and proven return histories,” the note said.

Lehman Brothers initiated coverage of Toll Brothers shares on Wednesday with an “overweight” rating.

CNBC’s senior economics reporter Steve Liesman maintains that “The mortgage market remains risky,” but said of the OFHEO’s move: “This should help. It can’t hurt.”

“What’s unique in this downturn is that Fannie Mae and Freddie Mac should have been playing a role in helping markets…counter-cyclically. After [the cap lift], they can now do so,” he said.