Homes For the Holidays: Homebuilders to Gain on Hope Trade, Raymond James Says

The past six months have been painful ones for homebuilders, as Fed tapering fears have caused mortgage rates to rise and investors to fret that the end of the housing recovery is nigh.

Sotheby’s International Real Estate

Consider: KB Home (KBH) and DR Horton (DHI) have dropped 29% during the past six months, while PulteGroup (PHM) has declined 24% and Lennar (LEN) is off 20%.

Now may be the perfect time to buy homebuilding stocks like KB Home, DR Horton, PulteGroup and Lennar, says the folks at Raymond James. Analyst Buck Horne and team write:

Based on our data documenting the performance of public homebuilders, we find the period running between mid-November and Super Bowl Sunday typically works best (generally November 15-January 31 on average) for this trading window. Most impressively, by our count, the homebuilding sector has outperformed the S&P 500 nine consecutive years during this calendar period, and 23 of the past 29 years. The average outperformance versus the S&P 500 has been over 1,100 basis points in the recent nine-year run, and roughly 1,000 basis points dating back to 1984. Moreover, whether interest rates have been rising or falling has mattered little to the success of the "Hope Trade". 79% of the time when 10-year Treasury rates were falling (15 of 19 years),  builders outpaced the S&P 500. When rates were rising, builders beat the market 80% of the time (8 of 10 years).

Their advice: Cover your shorts. That means they’ve upgraded DR Horton and KB Homes to Market Peform from Underperform. And if our idea of a good time is playing the upside in a potential short squeeze, then they have the stocks for you, too–Lennar and the St. Joe Co. (JOE), which have short-interest ratios of 25.3% and 14.3%, respectively. “For investors needing a little more excitement in their lives, we are also upgrading two names that we believe could uncommonly benefit from potential short-covering if "Hope Trade 2014" gains momentum,” Horne writes. Lennar goes to Strong Buy from Outperform and St. Joe goes to Outperform from Market Perform.