Kenneth Zener of Seaport Research Partners, renowned for his accurate predictions in the US homebuilder stock sector, is once again making waves with his latest recommendation. The closely monitored homebuilder stocks index experienced a 6% decline on Tuesday, the most significant drop since 2022, following disappointing earnings from industry bellwether D.R. Horton Inc. The company reported lower-than-expected figures in key areas, such as quarterly orders, and announced plans to reduce prices and maintain incentives for buyers, leading to investor disappointment.
Zener’s prescient move came a day before the sector’s decline, as he downgraded the sector from buy to neutral. Notably, he also downgraded major firms, including D.R. Horton, the largest builder by market value, from buy to neutral, resulting in the company’s most significant slump since 2020.
The sector witnessed a 35% gain last quarter, primarily driven by growing expectations for Federal Reserve interest-rate cuts. Zener’s analysis indicates that this surge already factored in the expected gains typically seen in the wake of Fed easing, based on historical data from the past 18 rate-cutting cycles.
In his note on Monday, Zener emphasized the need to avoid overstaying the cyclical call made in early November when he upgraded several homebuilder shares to buy, predicting a 25% near-term upside. The homebuilder gauge indeed rose by 28% from that point through year-end.
Zener correctly anticipated a challenging start for homebuilder stocks in 2022, their subsequent rebound, and predicted strength in 2023. In a recent interview, he suggested that while the sector may have reached its peak for now, economic indicators, especially employment data, will guide analysts’ future calls. Positive signs that elevate expectations for interest rates may undermine homebuilder shares, and vice versa.
Zener is not alone in exercising caution regarding homebuilder stocks; Michael Dahl at RBC Capital Markets also maintains a neutral rating on the sector. D.R. Horton’s recent results have added to concerns, with Dahl noting a potential reality check for the group after its robust rally.
Looking ahead, Zener envisions the industry’s margins bottoming out as incentives ease, albeit partially offset by rising costs, including those for lumber and labor. The upcoming earnings reports from NVR Inc. and PulteGroup Inc., the third- and fourth-largest US homebuilders, are eagerly awaited as they provide further insights into the sector’s performance.
