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Analyst Watch: These Homebuilders Have Solid Foundations

Shares of homebuilders surged Monday after the government released data showing new home sales jumped in June by nearly 24 percent from a month earlier, when sales sank to the slowest pace on record.

The Commerce Department said sales of newly built homes reached a seasonally adjusted annual sales pace of 330,000 last month, the second-weakest month on record.

New home sales are down 72 percent from their peak annual rate of 1.39 million in July 2005. After the housing bubble burst, sales plunged to 375,000 last year. That was the weakest yearly total on records dating back to 1963.

Here's what guests on today's Squawk on the Street are watching before the opening bell:

Josh Levin, Citi Homebuilding analyst, says the firm is not partcularly bullish on the housing market, "but we are bullish on the homebuilding stocks because the stocks are pricing no recovery."

Homebuilders are not dead, he says, merely resting, and they're in a good place.
"They're better positioned today than at any time since the onset of the downturn," he says.

Most notably:

  • Balance sheets are strong and survivorship risk is off the table;
  • Operations have been retooled for profitablility more so than at any point since '07; and
  • home price declines are largely but not entirely behind us

Citi's top picks among the homebuilder stocks are:
Beazer Homes USA

Pultegroup

Megan Talbott Mcgrath, Barclays Capital Homebuilder analyst, says everyone is trying to figure out where we will "normalize" after the tax credit.

"Builder earnings start in earnest this week, so I think all investor ears will be on management commentary on the current environment and any updates on profit forecasts," she says.

"For us, the focus going forward will be on profitability," she says. "If we are, in fact, in a bit of a lower demand environment in the near term after the tax credit, are there some companies that can still post profits? We think the answer is yes, which is the key factor behind our buy ratings on DR Horton and Lennar."

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Disclosure: Immediate disclosure information was not available.

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Disclaimer

The Associated Press contributed to this report.

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