Is It Time Buy The Dip In Homebuilder Stocks? KeyBanc Says Yes, Names Top Picks

Homebuilder stocks have gotten crushed so far in 2022, but one Wall Street analyst said Monday now is the time for investors to buy the dip.

The Analyst: KeyBanc analyst Kenneth Zener has issued the following homebuilder stock upgrades:

• D R Horton Inc DHI upgraded from Sector Weight to Overweight with an $84 price target.
• KB Home KBH upgraded from Underweight to Sector Weight.
• Lennar Corporation LEN upgraded from Sector Weight to Overweight with an $89 price target.
• Meritage Homes Corp MTH upgraded from Sector Weight to Overweight with an $87 price target.
• PulteGroup, Inc. PHM upgraded from Sector Weight to Overweight with a $47 price target.
• Toll Brothers Inc TOL upgraded from Underweight to Sector Weight.
• TopBuild Corp BLD upgraded from Sector Weight to Overweight with a $205 price target

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The Thesis: In the upgrade note, Zener said the difficult housing market will persist, but many homebuilder stocks have sold off so aggressively that there is significant long-term upside for investors willing to ride out the storm.

"The essence of our call lies between Jessie Livermore ('There is a time to go long, a time to go short, and a time to go fishing') and Wayne Gretzky ('Skate to where the puck is going, not to where it is)," Zener said.

He pointed out that data since 1963 showed homebuilders fall by an average of 41% as a group during each down cycle in the housing market compared to just a 28% average drop for the overall S&P 500. However, homebuilder stocks also rise by an average of 194% during housing market upcycles compared to just a 141% average gain by the overall S&P 500.

Zener said he is not expecting housing market conditions to improve anytime soon, but homebuilder stocks could start to gain traction sooner than expected.

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For now, Zener said investors will likely be safest in homebuilder stocks that have high returns on inventory (ROI), which he said will likely produce better risk-adjusted returns and outperform their peers as the next cycle matures.

Benzinga's Take: It may take a while for the housing market and for homebuilder stocks to start heading in the right direction again, but the aggressive sell-off in the stocks in 2022 may limit further downside in the near term.

All seven of the homebuilder stocks Zener upgraded currently have forward earnings multiples in the single digits.