Are Homebuilders, Home Improvement Stores Coming Back? (NVR, TOL, PHM, HOV, DHI, BZH, HD, LOW)

Stocks in homebuilders have been down so low for so long that almost anything look like up. Recent earnings releases have indicated that new orders are improving, but much of the improvement is tenuous and could easily be wiped out by cancellations. We’ve reviewe six builders — NVR Inc. (NYSE: NVR), Toll Brothers Inc. (NYSE: TOL), PulteGroup Inc. (NYSE: PHM), Hovnanian Enterprises Inc. (NYSE: HOV), D.R. Horton Inc. (NYSE: DHI), and Beazer Homes USA Inc. (NYSE: BZH) — to see if there is any upside potential in these stocks, and included The Home Depot Inc. (NYSE: HD) and Lowe’s Cos. Inc.(NYSE: LOW), which may be better bets.

Among the six homebuilders, only NVR had a significant jump in its target price since mid-October. The median target price for NVR is now $765, up from $728, and the stock price as of about noon today is $682.57, for an upside potential of 12.1%. That’s not a grand number, but it’s the best in the sector. Target prices for PulteGroup, D.R. Horton, Hovnanian, and Beazer did not change and the target price for Toll Brothers rose just $0.15, from $21.50 to $21.65. Not a big display of confidence in the sector.

Home Depot’s median target price rose from $40.00 to $42.00, and the stock’s current price of $40.51 implies a potential gain of 3.7%. Lowe’s median target price rose from $23.00 to $26.00, and at the current price of $25.13 the implied gain is 3.5%. Even though now is not a particularly good season for home improvement projects, either one or both of these stores could easily push through the new targets.

While the target prices did not change for five of the homebuilders, all but NVR saw share price gains of more than 30% in the last six weeks, with PulteGroup shares gaining 51%. Home Depot and Lowe’s shares are up 16% and 19%, respectively, in the same period. These share price rises for homebuilders indicate more investor interest in these stocks, analysts’ lack of enthusiasm indicates that caution remains the best policy.

None of these builders pays a dividend, with the exception of Beazer which offers investors a dividend yield of 1.2%. Home Depot’s dividend yield is 2.9%, and Lowe’s offers a dividend yield of 2.3%.

For investors who believe they have to participate in this sector, Home Depot remains the best choice, with Lowe’s the best alternative. Building — and selling — new houses is still a risky business.

Paul Ausick