After some home builder stocks nearly doubled in 2012, one analyst says the sector has gotten ahead of itself. But don't fret. He has another stock that potentially could double as the housing recovery builds steam.
Jack Micenko of Susquehanna Financial Group downgraded the home builders group in late September. While he missed roughly 15 percent of the run at the end of last year, he said the group has underperformed the broader market year to date.
"The public home builders had a phenomenal 2012," Micenko told CNBC Thursday. "There are very optimistic viewpoints in terms of both volume and margins on the builders. We think they're ahead of themselves."
While they're better companies than they were before the housing collapse, Micenko has "negative" ratings on DR Horton (DHI), Lennar (LEN), Toll Brothers (TOL) and PulteGroup (PHM) and "neutral" recommendations on KB Homes (KBH) and NVR .
Instead, the analyst prefers mortgage insurer Radian Group , upgrading the stock this week to "positive" from "neutral."
"If you missed the home builder stock run of 2012, we believe Radian is the next name with about 100 percent upside from current levels as purchase demand and home prices continue to improve at a modest clip," Micenko wrote in a research note.
Radian is one of the few mortgage insurers that has survived the downturn and has grown into the largest, Micenko told CNBC's "Squawk on the Street."
The company will also benefit from rising interest rates as the mortgage market shifts from refinancing to home purchases, which is a higher margin business. On a new home, purchasing mortgage insurance is a recurring, monthly payment. In contrast, refinancing often is a one-off payment, Micenko explained.
"As the housing market improves and purchase demand recovers, we think there's opportunity to move into a higher ROE (return on equity) mix of business," he said.
Radian will also benefit as home prices start to climb. "The builders are now facing labor constraints and higher pricing on materials," Micenko told CNBC. "Price improvement for Radian drops straight to the bottom line, so we think that's a better play on (home) price appreciation as well."
Susquehanna and/or its affiliates beneficially own one percent or more of the securities of KB Homes and Lennar and is a market maker in securities of Radian, DR Horton, KB Homes, Lennar, PulteGroup, NVR and Toll Brothers.
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