MKM: Year-End 'Hope Trade' Boosts Home Builders

With home-builder shares up 18 percent on average in the past month, an analyst boosted ratings on three players in the sector Friday to Market Perform.

"Now isn't time of year to be short on home-builders,' Raymond James' Buck Horne said in a research note boosting ratings on D.R. Horton, Inc. (NYSE: DHI), KB Home (NYSE: KBH) and M.D.C. Holdings, Inc. (NYSE: MDC).

MKM Partner's Megan McGrath said the recent uptick for shares in the sector is due to "the seasonal 'hope trade'" in which investors drive up home-builders' stock prices at year end, in hopes of a strong spring selling period.

The annual phenomenon may be getting a boost this year from exceptions that financing standards for buyers will decline, McGrath said.

Investors may also perceive that the market overreacted during the second quarter to signs of weakness in the housing market.

But McGrath is cautious on the sector which, on average is down 10 percent from a peak in February.

Only four of the 11 large public builders "actually beat earnings estimates for the quarter," McGrath said.

McGrath maintained Buy ratings on Toll Brothers Inc (NYSE: TOL) citing its niche position in the luxury market and KB Home because of expected margin improvements.