Homebuilders Have Lagged the Market — Four to Buy Now

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While the S&P 500 is unlikely to end up the year with a stunning 30% gain as it did in 2013, as the first half of this year winds down, the venerable index is up 6.1%. The homebuilders, which had a very slow winter and spring due to the bad weather around the country, are up only 1.4% in comparison. With mortgage rates starting to fall back, the summer selling season starting to kick in and a buyer's market still holding court in some areas of the country, the sector could be poised for a much stronger second half and a solid 2015.

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A new research report from UBS expects the Home Sales Index to increase of 2.5% sequentially, compared to consensus for the index to be up 1.3%. The analysts believe this will indicate a stabilization in sales after declining earlier in the year. Also, positive reports last week from Lennar and KB Homes kicked off the earnings season with good sales and earnings.

With the sector still somewhat out of favor, UBS recommends investors buy these four top names rated Buy.

Beazer Homes USA Inc. (BZH) builds quality single-family homes in 16 states and is one of the 10 largest homebuilders in the country. By focusing on the high growth states the company has consistently been able to match Wall Street estimates. The company's homes are designed to appeal to homeowners at various price points across various demographic segments and are generally offered for sale in advance of their construction. The UBS price target for the stock is $28. The Thomson/First Call consensus target is at $23.71. Beazer shares closed Friday at $20.88.

Hovnanian Enterprises Inc. (HOV) is a small cap name that could provide some big gains for investors. The stock has struggled somewhat compared to the other top names in the sector, but recently it has seen some large option buying in the stock has garnered some attention.

While the company posted a small loss in its fiscal second quarter, it did see strong growth in revenue. Hovnanian also saw significant rise to the value of its backlog of contracts, which rose from $865 million to $1.05 billion, a gain of 21% year-over-year. In total, the homes in backlog increased to nearly 2,800, a gain of 13.6%. The UBS price target is $6, while the consensus target is $4.82. Hovnanian closed Friday at $5.30.

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PulteGroup Inc. (PHM) is the top homebuilding pick at UBS, and the stock could be poised for a very strong second half of 2014. The company ranks as one of America's largest homebuilding companies, with operations in approximately 50 markets throughout the country.

Through its brand portfolio, which includes Centex, Pulte Homes, Del Webb and DiVosta Homes, the company has become one of the industry's most versatile homebuilders, able to meet the needs of multiple buyer groups. This helps it when one segment of buyers slows down. Investors are paid a 1% dividend. The UBS price target is $25, and the consensus figure is $21.91. Shares closed trading Friday at $20.08.

Ryland Group Inc. (RYL) is a homebuilder and a mortgage-finance company that has six operating business segments. They operate in four geographically determined homebuilding regions, financial services and corporate. Pent-up demand from young adults is one of the key reasons to own the stock. The price points are designed to attract the first-time and second-time buyers, and that is a large segment coming in to the current market. The stock pays a small 0.3% dividend. UBS has a $52.50 price target, and the consensus target is $46.83. Ryland closed Friday at $39.20.

The big money that was made in the homebuilding stocks after the housing collapse and the great recession is over. Investors looking for solid portfolio additions in what has become a pricey market may want to look at these top names to buy. They could bring good gains for the rest of the year as they play catch-up to the rest of the overall market.

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