Compass Point Upgrades Homebuilders Beazer (BZH), CalAtlantic (CAA) Ahead of Seasonal Hope Trade

From 1998 through last year, or over the last 17 years, the home builders outperformed the S&P 500 between November 21st and February 6th by 14% on average. The idea is to buy the builders near year-end as the market ramps up expectations for a strong spring selling season.

Compass Point analyst, Wilkes Graham, believes that the 2015 Hope Trade will be fueled this year by persistent investor hopes for loosening credit in 2016 given (1) that sales volumes continue to be driven by the upper-end of the market, leaving the most room for improvement at the lower end, and (2) policy efforts at the GSEs and FHA increase mortgage credit.

Lower price point builders have outperformed the sector on numerous verticals this year, and he thinks this outperformance should continue as home builders are rewarded for strong volumes. As such, winners out of the home builder sector in the low price point category under our coverage include DR Horton (NYSE: DHI) and Beazer Homes (NYSE: BZH).

Graham also believes there is a disconnect between (1) underlying small cap housing fundamental outperformance and (2) YTD market underperformance. This leads him to favor small cap home builders (with lower price points) heading into the seasonal Hope Trade. There is the largest room for an upward correction from this market cap range. As such, our favorite name under coverage in the small cap and low price point bucket is BZH.

Graham upgraded BZH to Buy from Neutral based on "(1) the Company’s above average exposure to homebuyers who rely on credit due to their sector-low average price point, (2) its small market cap, and (3) large exposure to favorable markets YTD (South and West)."

He also upgraded CalAtlantic (NYSE: CA) to Buy from Neutral "largely due to (1) the Company’s move up in market cap due to the closing of its merger of equals on 10/1/15, (2) it’s strong combined geographic exposure, and (3) the $50M-$70M of expected synergies to come on line in 2016."

Other homebuilders:

• KB Home (NYSE: KBH)
• Toll Brothers (NYSE: TOL)
• PulteGroup (NYSE: PHM)
• Hovnanian Enterprises (NYSE: HOV)

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