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HomeMarketToll Stock Is Upgraded as Analyst Looks Positively on Homebuilding Sector

Toll Stock Is Upgraded as Analyst Looks Positively on Homebuilding Sector

J.P. Morgan analyst Michael Rehaut upgraded shares of Toll Brothers to Overweight from Neutral.

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Toll Brothers
was rising Tuesday along with other homebuilding stocks after an analyst at J.P. Morgan said he was taking a positive stance on the sector.

It currently offers a “favorable risk/reward, given that to the extent that the Fed
tightening cycle ends” in the first half of 2023, proving to be a “significant positive catalyst for the group,” the analyst said.

J.P. Morgan analyst Michael Rehaut upgraded shares of residential homebuilder
Toll Brothers
(ticker: TOL) to Overweight from Neutral and raised his 12-month price target on the stock to $58 from $47.

“We expect fundamentals to begin to stabilize in 2023 alongside a potentially steady if not more moderate interest rate backdrop,” Rehaut wrote.

The U.S. central bank has raised interest rates six times this year, with the last four by a super-sized 75 basis points, in an attempt to corral rising inflation. Mortgage rates and the cost of buying a home have skyrocketed this year, with the average rate on a 30-year fixed-rate mortgage currently at 6.61%. That’s a major decline from the prior week, but still historically high. With the price of buying a house out of reach for many, home sales and the pace of new home construction have been falling.

But Rehaut believes the Fed will soon start to slow down the pace at which it has been hiking interest rates. That will lend an assist to companies like Toll Brothers, and the homebuilding sector as a whole.

“… to the extent that the Fed tightening cycle ends in the first half of 2023, this could allow for interest rates to decline from current levels over the next 12 months and hence be a significant positive catalyst for the stocks, as we highlight historical outperformance following the end of prior Fed tightening and rising rate periods,” Rehaut wrote in a research note.

According to the CME FedWatch tool, 75.8% of traders anticipate the Fed will hike interest rates by 50 basis points when it next meets in December.

There are still risks to the housing market, such as a possible recession. However, Rehaut wrote that he thinks homebuilding stocks are already pricing in a mild recession, and if one does happen in 2023 “we do not view this as problematic for the sector, as not only is housing already likely experiencing something greater, but we also note that the builders have outperformed during the last two mild recessions.”  

The
S&P Homebuilders exchange traded fund
was up 1.4% Tuesday. Toll Brothers stock gained 1.3%,
PulteGroup
(PHI) jumped 1.7%,
KB Home
(KBH) climbed 1%, and
Taylor Morrison Home
(TMHC) was 2% higher.

Write to Angela Palumbo at angela.palumbo@dowjones.com

Credit: marketwatch.com

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