Raymond James Upgrades Homebuilders

Raymond James analyst Buck Horne upgraded homebuilder stocks and advised investors to participate in the seasonal "Hope Trade" in these stocks.

The "Hope Trade" is noted as a "powerful and consistent seasonal trading phenomenon" window from November 15- January 31. The analyst commented that over the past nine consecutive years, the homebuilding sector has outperformed the S&P 500 on an average of 1,100 basis points.

Horne wrote, "We have recently become more comfortable renewing this call due to three factors: 1) job growth and GDP growth remain lackluster, but steadily positive; 2) builder valuations have compressed nearly 30% since peaking in May; and 3) the 3Q earnings season has provided cover for analysts to reduce 2014 estimates to more reasonable levels following the summer sales slowdown."

Raymond James upgraded DR Horton Inc. (NYSE: DHI) and KB Home (NYSE: KBH) from Underperform to Market Perform. The analyst added that he is concerned over their "high exposure to mortgage-constrained first-time buyers, disappointing new order trends, and active communities that rank among the weakest in school district scores relative to peers." The analyst favors Toll Brothers Inc. (NYSE: TOL) and WCI Communities Inc. (NYSE: WCIC) with a Strong Buy rating. Horne noted that Toll Brothers and WCI Communities cater to luxury new home buyers. These high-end customers are less dependent on mortgage underwriting criteria and have positive equity. According to Raymond James research, TOL and WCIC have "two of the highest quality land positions (and most long-dated as well) of any builders in our coverage."

Horne upgraded Lennar Corp. (NYSE: LEN) and The St. Joe Company (NYSE: JOE) for risk-taking investors looking for the benefit from "Hope Trade 2014." The analyst upgraded Lennar from Outperform to Strong Buy with a $41 price target. Raymond James upgraded St. Joe from Market Perform to Outperform with a $20 price target.

Derivative calls, Weyerhaeuser Co. (NYSE: WY) and American Residential Properties, Inc. (NYSE: ARPI), are rated as a Strong Buy. Raymond James noted that investors of small family rental companies could directly benefit in the "Hope Trade" as construction costs and future home prices increases. Further, the analyst sees Weyerhaeuser's timber portfolio and wood products businesses in a solid position to also benefit from a stronger housing demand.

Horne concluded, "The “Hope Trade” typically is a seasonal call – and we note that homebuilders have a similarly inverse track record of underperformance during the summer months. Thus, we remind investors to remain nimble with any new positions in the sector."

Shares of WCI Communities are up 3.96 percent. KB Home and Lennar Corp are both up around 2.5 percent. Toll Brother shares are trading +1.12 percent. St. Joe and DR Horton are up approximately 0.10 percent. Weyerhaeuser shares are up .41 percent. American Residential shares are trading at $18.49 up 0.76 percent.

SPDR S&P Homebuilders ETF closed at $31.06 and is currently +0.93%.