Why Home Builders Might Be Ready to Rebound

While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a closer look at particularly stock-shaking upgrades and downgrades -- just in case their reasoning behind the call makes sense.

What: Shares of Lennar (NYSE: LEN  ) , NVR (NYSE: NVR  ) , and KB Home (NYSE: KBH  ) all rallied on Friday after Susquehanna International Group upgraded the home building stocks from neutral to positive.

So what: Along with the upgrades, analyst Jack Micenko raised his price target on Lennar to $41, NVR to $1,100, and KB Home to $22, representing upside of 18%, 21%, and 29%, respectively, to where each stock sits now. Shares of home builders had sold off over the past week and a half on default worries, but Micenko thinks that it provides investors with a solid entry point given the industry's upbeat outlook.

Now what: Susquehanna believes that home builders represent both a juicy short- and long-term play.

"Rates have moved off highs, affordability remains strong, mortgage credit is getting looser, and home prices continue to move in the right direction. The builder stocks have been disproportionately punished in the past ten days on default concerns," noted Susquehanna. "Additionally, in each of the last six years, buying the homebuilder stocks before Thanksgiving and selling them on tax day has generated positive returns every year, at an average of 22.5% per season." 

While I wouldn't recommend that rather speculative trading idea to average investors, the home building sector certainly looks like a place for solid long-term opportunities.

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