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Builder Stocks With Big Potential: Pro

Wednesday, 22 Aug 2012 | 5:17 PM ET
NicK White | Cultura | Getty Images

Signs of a budding housing recovery continue cropping up as mortgage interest rates hover near record lows and home prices show signs of stabilizing. So how should investors play the nascent recovery? Hold off on Toll Brothers, advises one analyst.

Stephen East, an analyst at ISI Group, told CNBC’s “Squawk on the Street”that he is seeing strength in the luxury housing market, as well as demand in the move-up market that he thinks is poised to accelerate.

Although luxury homebuilder Toll Brothers on Wednesday reported a 41 percent revenue surge and a spike in new orders compared to last year, East cautioned against jumping into the stock due to its rich valuation.

Despite a beat by Toll Brothers on both third-quarter earnings and revenue, East has a “hold” rating on the company’s shares.

“We probably have upside — I would call it 20 percent or so over the next 15 months,” he said. “But in this sector, that’s not nearly as much as what a lot of investors look for.”

Toll Stands Tall After Earnings Beat
The largest luxury home builder in the U.S. reported a higher quarterly profit as well as a sharp jump in new orders. Stephen East, ISI Group analyst, explains why he has a "hold" rating on Toll Brothers.

A 20 percent rise may seem like a decent investment, but other builders have significantly more upside, East said.

“I think Pulte is probably the single name that I like most,” he said. “I think it’s a tremendous turnaround story that they’ve really executed well and driven operating profit pretty nicely.”

Another name, D.R. Horton is trading on par with other home builder stocks. Each stock that East mentioned has more than doubled in price in the past year.

“It’s arguably one of the best-run companies out there, with some of the strongest operating margin, as well,” he said about D.R. Horton.

He added that Lennar has executed better than anyone on the land side, which has set it up for accelerating growth in profits over the next year or two.

Investors who are still hesitant about betting on strength in home builders will get another look into the housing crystal ball soon. On Thursday at 10 a.m. EST, new home sales data are set to be released.

—By CNBC.com’s Katie Little; Follow Her on Twitter @katielittle

Additional News: Existing Home Sales Up

Additional Views: Bearish on Building Products

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Disclosures:

No disclosure information was available for Stephen East.

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