Valuations of home builder stocks have jumped into uncharted territory, says one analyst who still sees promise in a few of the sector’s names despite the lofty prices.
Buck Horne, an analyst at Raymond James, said investors have been underestimating the quality ofToll Brothers’ land assets.
Despite being one of the highest quality builders, Toll Brothers is trading at a discount relative to its peer group, Horne added.
“Pulte is also an idea that we’re still recommending as a relative value opportunity,” he said.
Horne sees further promise in real estate investment trusts that own apartment buildings as potential first-time home buyers experience difficulty obtaining mortgages.
“We’re not seeing an exodus of renters out of apartment REITs yet, and so I would tell you there’s a lot of value in the apartment REIT sector and the potential earnings power of that group looking out that people are largely ignoring this year,” he said.
Meanwhile, Horne has a “neutral” rating on shares of Lennar, whose shares hit five-year high on Monday after it reported its in almost four years in its quarterly earnings report. Although the company is “firing on all cylinders,” its relative value is in line with the group, he said.
KB Home, whose prices have risen “too far, too fast,” Horne said, is one stock that he is not recommending. He has an “underperform” rating on the company’s shares.
Barring an external financial impact from the or European debt crisis, Horne said the housing market has already bottomed.
“The argument’s now about the pace of recovery from here and what’s reasonably possible for an industry that’s actually been capital starved for five or six years,” Horne said.
As administrators and policymakers push to open up lending standards to help housing continue to recover, Will Randow, an analyst at Citigroup, listed DR Horton as one stock that could benefit from a potential influx of first-time home buyers.
—By CNBC.com’s Katie Little; Follow Her on Twitter @katie_little
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Citigroup Global markets currently has, or had within the past 12 months, Lennar as an investment banking client. Buck Horne, an analyst at Raymond James, does not own shares of Lennar.