Analyst Picks Outperforming Housing Stocks

Homebuilder Toll Brothers said its fiscal second-quarter profit fell sharply from the year-ago period. Yet April new-home sales topped estimates, jumping 16.2%. Nishu Sood, sector analyst at Deutsche Bank, joined "Squawk on the Street" to make sense of the news -- and offer ways to play the housing market.

Sood told CNBC's Erin Burnett that the shape of housing depends on which element you look at: He believes that construction activity (and its accompanying impact on construction jobs) has probably passed through the "worst" of its volume decreases, though the subsector's return may be slow.


But he said that the "main story this year" will be a continued slide in home prices -- and its impact on consumer spending is a "significant worry" for the second half of fiscal 2007.

However, Sood gives "buy" ratings to two homebuilders: Centex and Lennar. He said the firms' shares "rally in anticipation of good news quite a few months out." And the analyst notes that, however murky the second-half outlook may be, "certain builders" will outperform their peers, thanks to fortunate geographic positioning and smart pricing.

Analyst disclosure: Toll Brothers is an investment banking client of Deutsche Bank, which holds a significant amount of the company's stock.