Although the U.S. housing market is improving and home prices look to have bottomed, some analysts are saying the run may be over for the home builders and other housing-related stocks.
U.S. home resales edged higher in January and left the supply of homes at its lowest level in 13 years, a sign that steam is gathering in the housing market. But National Association of Home Builders' monthly confidence index did tick lower for the first time in 11 months, as builders worry about both access to mortgage credit but also higher labor and materials costs. Housing starts in January fell 8.5 percent.
With some home builder stocks having doubled in 2012, analysts caution that the group has likely gotten ahead of itself. Shares of Toll Brothers sold off sharply after the luxury home builder closed fewer sales in the latest quarter than analysts were looking for.
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UBS analyst David Goldberg and Jack Micenko of Susquehanna both told CNBC this week that they're more cautious on the group.
"The public home builders had a phenomenal 2012," the Micenko said. "There are very optimistic viewpoints in terms of both volume and margins on the builders. We think they're ahead of themselves."
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He has "negative" ratings on DR Horton, Lennar, Toll Brothers and PulteGroup and is "neutral" on KB Homes and NVR given their loftier valuations post run-up. He prefers mortgage insurer Radian Group which will benefit from both rising interest rates and increasing home prices.
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Goldberg is on the sidelines saying there's a lot baked into some of the safer home builder names. But if an investor wants to be long housing right now, Goldberg recommends the riskier, high-beta names like Beazer and Hovnanian.
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Bob Wetenhall, an analyst at RBC Capital Markets, remains bullish. He expects a beat and raise story for the group, telling CNBC "we recommend buying builders and adding on dips."
While rising materials costs for home builders might mean better opportunities in the building materials group, investors will want to be selective.
Megan McGrath, MKM Partners analyst, told CNBC the suppliers that see increased volumes while raising prices and expanding margins, "can do better than the home builders who are feeling the headwinds of those cost increases they didn't feel last year."
Owens Corning, for one, is optimistic it can increase roof prices this year, but said an improvement in its insulation business will take more time. The company also expects stronger demand for roofing supplies as existing home sales pick up.
"We believe we will begin to grow in 2013, and we'll probably have a 3 year to 4 year run where we could see 10 percent to 15 percent growth in re-roof demand," CEO Michael Thaman told CNBC.
With most home builders sporting market caps below $5 billion, investors piled into the much larger home improvement retailers last year as the more liquid way to take advantage of a housing recovery.
Oppenheimer analyst Brian Nagel sees continued demand for home improvement products, potentially at an accelerating pace. He re-upgraded Home Depot this week to "outperform" after a downgrade to "perform" back in October.
"We now again view both Home Depot and Lowe's as well positioned to capitalize upon improving demand trends in the home improvement sector and, over time, to surprise investors with solid and persistent comp and EPS upside," he wrote in a research note.
But Stifel analysts are calling time on the home improvement retailers' run, downgrading both Home Depot and Lowe's to "hold" from "buy" this week.
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With the two stocks are up about 40 percent over the past year, Stifel said valuations are at peak levels and improvement in housing could start to level off.
But the analysts acknowledge there is a risk this call is early, particularly if the retailers see a surge in fourth-quarter sales in stemming from housing recovery and rebuilding from superstorm Sandy. "However, we believe significant benefits are already reflected at these valuations," the analyst wrote.
Lowe's reports fourth-quarter earnings on Monday followed by Home Depot on Tuesday.
Disclosures: RBC makes a market in Toll Brothers and Owens Corning securities; UBS has a business/banking relationship with and maintains a company holding of Ryland, Pulte Groupe, Meritage and KB Home; Susquehanna and/or its affiliates beneficially own one percent or more of the securities of KB Homes and Lennar and is a market maker in securities of Radian, DR Horton, KB Homes, Lennar, PulteGroup, NVR and Toll Brothers.