Despite another bleak foreclosure report, housing stocks increased Wednesday after an analyst said valuations already have discounted continued housing weakness and disciplined builders could outperform this year.
In a client note Wednesday, Wachovia Capital Markets analyst Carl Reichardt said he expects hyper-competition among builders, limited mortgage availability, high supply and buyer fear to keep home sales and margins depressed throughout the year.
However, he believes builders' stock prices already account for this dismal outlook.
"In this maturing industry environment, we believe builders more focused on consistent cash flow generation while operating with conservative leverage levels and consistent share repurchase models will outperform," he wrote.
The note follows Toll Brothers Inc.'s preliminary home-building sales report late Tuesday. The luxury homebuilder said sales in its second quarter dropped 30 percent to $817.9 million from the previous year.
Toll Brothers shares added 76 cents, or 3.3 percent, to $24.03 in morning trading. Shares of competitor Hovnanian Enterprises Inc. rose 28 cents, or 3.2 percent, to $9.03.
Meanwhile, Irvine, Calif.-based RealtyTrac Inc. said Tuesday the number of U.S. homes facing foreclosure climbed 65 percent in April over the year-ago period.
One in every 519 households nationwide received a foreclosure filing last month.
Yet builder shares seemed to shrug off the report. Pulte Homes Inc.'s stock rose 4.7 percent to $13.50, while KB Home edged up 25 cents to $24.31. Lennar Corp. gained 3.5 percent $19.37.
Shares of Standard Pacific Inc. jumped 31 cents, or 11 percent, to $3.01 in morning trading. Late Tuesday, the builder said its creditors extended a waiver permitting it to be in noncompliance with their financing agreements without default.
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