By Sinead Carew and Rodrigo Campos
July 14 (Reuters) - Investors may have overbuilt U.S.
housing stocks as data has yet to match up with the homebuilder
sector's biggest rally in five years.
The S&P 1500 Homebuilding index of homebuilder
companies has surged 32 percent this year and hit a decade-high
earlier this week. By contrast, the wider S&P Composite 1500
Index has gained less than 9 percent.
Housing optimists are pinning their bets on strong U.S. job
creation, low interest rates, tight housing supply, robust
earnings estimates and a lack of recessionary red flags.
Some investors still see opportunities, but others warn the
stocks may have run too far.
"The sentiment has been quite positive for housing but where
they are today, I'm not a buyer of housing stocks. The stocks
have run up faster than the data supports and there are better
pockets of value in the market," said Erin Browne, global macro
portfolio manager at UBS O'Connor in New York.
Brown cited weakening growth in building permits and new
projects, known as housing starts, since the first quarter as
well as land and labor constraints.
"While new home sales still look solid, they are still low
versus historical levels, given the ongoing shortage of skilled
labor and buildable lots which is constraining faster growth,"
Data shows first quarter single-family housing starts grew 6
percent year-over-year and 8.5 percent in May. Overall housing
starts have risen 1.27 percent so far this year. Next week's
June data is expected to show an 8.3 percent increase from May.
"Demand overall has been positive for the builders,"
according to Will Randow, analyst at Citi, although he
questioned whether it was positive enough to support such an
outsized gain by the group.
Randow believes the stocks have risen partly on hopes that
policy changes by the administration of U.S. President Donald
Trump could help boost home sales.
Wall Street analysts expect most home builders to report
solid double-digit earnings growth, according to Reuters data.
D.R. Horton Inc, whose quarterly profit is seen
rising 14 percent, and PulteGroup, pegged for 15.5
percent earnings growth, will both report in the last week of
But Randow says the 2017 median earnings estimate for 12
housing stocks he covers has barely changed in the last three
"Maybe the stocks have gotten ahead of themselves. It
doesn't necessarily mean we're going to see any sort of
correction in housing starts."
Earlier this week, Barclays downgraded four U.S.
homebuilders, citing a buyer traffic pullback in its June survey
that was inconsistent with rising valuations.
Short interest in seven homebuilders - the four biggest and
the three biggest year-to-date gainers - has risen by 20 percent
for 2017, with much of that increase coming in June and July,
according to financial analytics firm, S3 Partners.
Of the seven, the biggest recent short-selling increase was
in LGI Homes, whose shares are up 46.6 percent for
2017, followed by NVR Inc, up 51.4 percent.
And recent trading in SPDR S&P Homebuilders ETF has
leaned toward defensive bets with options positioning implying
investors are on guard against a near-term decline.
Still, some investors still see value.
Gary Bradshaw, portfolio manager at Hodges Capital
Management in Dallas, likes D.R. Horton and LGI Homes, and
expects a home shortage to boost prices.
"Maybe there's another 20 percent in these stocks over the
next 12 months, assuming that interest rates stay relatively
low," said Bradshaw. "I still think there's plenty of home
buyers and not that many homes."
(Additional reporting by Saqib Iqbal Ahmed; Editing by Megan
Davies and Bernadette Baum)
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