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Shares of D.R. Horton Inc. and KB Home fell Monday after JPMorgan analyst Michael Rehaut backed away from his bullish ratings on the home builders, citing concerns that the recent rise in mortgage rates will hurt demand for housing.
For KB Home
KBH,
Rehaut went as far as swinging to bearish, saying the stock’s recent outperformance has made it expensive relative to its smaller-capitalization peers.
“Following a reasonably solid [fourth-quarter] earnings season (relative to expectations), while we remain positive on the home builders for 2023, at the same time, we believe fundamentals may go sideways if not soften somewhat over the next quarter or so as the housing market absorbs the past months’ roughly [7 percentage point] increase in mortgage rates,” Rehaut wrote in a note to clients.
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D.R. Horton’s stock
DHI,
fell as much as 1.5% intraday before bouncing to be down 0.4% in morning trading, as the Texas-based builder, with a $31.7 billion market cap, was downgraded to neutral from overweight. Rehaut cut his stock-price target to $102.50 from $107.
Rehaut said he believes the company’s premium valuation is “fairly reflecting its above-average fundamental profile,” so he expects the shares to perform more in line with peers.
The stock has gained 10.1% over the past three months and advanced 8.2% over the past 12 months, while the iShares U.S. Home Construction exchange-traded fund
ITB,
has rallied 15.3% over the past three months and edged up 3.2% the past year.
In comparison, the S&P 500
SPX,
has tacked on 3.3% in the past three months but slipped 5.8% over the past year.
Shares of California-based KB Home
KBH,
with a market cap of about $3 billion, shed 1% but had been down as much as 2.3% earlier after Rehaut’s double downgrade to underweight from buy. He cut his price target to $32.50 from $36.
Rehaut said KB Home’s market valuation is “well above its smaller-cap peers,” which makes the stock look “expensive,” especially given that his outlook for the company’s fundamentals includes below-average gross margins and return on equity.
The stock has run up 16.9% over the past three months but has dropped 9% over the past year.
Separately, Meritage Homes Corp.’s
MTH,
stock moved up 1.7% in morning trading after Rehaut raised his rating on the Arizona-based builder, which has a $4.1 billion market cap, to overweight from neutral.
He said the stock’s current market valuation doesn’t properly reflect his outlook for “above-average fundamentals.”
The stock has soared 30.7% over the past three months and climbed 13.3% over the past year.
