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Monday, Seaport Global Securities shifted its stance on Toll Brothers (NYSE:TOL) stock, upgrading the rating from Sell to Neutral. Analyst Kenneth Zener highlighted the reconsideration of the negative outlook following the sector's performance in the fourth quarter of 2024. Despite maintaining a generally negative bias due to concerns such as regional margin risks, the increase in new supply, and valuations that are 15-20% above trough levels, Zener acknowledged factors that could ease these concerns. He pointed to the sector's 20% sell-off, which is 24% relative to the S&P, and the potential for a favorable valuation "re-rating" due to lower leverage and higher return on equity (ROE) post-Covid.
Zener emphasized the current Bear Steepener environment, which suggests that a strong economy could reduce the justification for rate cuts. This perspective aligns with the macroeconomic views of Torsten Slok and James Grant. Additionally, the analyst noted a forecasted decline in housing starts for the first half of 2025 to address the surplus of new units for sale, which is currently 30% above the long-term average according to Census data.
In the broader housing sector, Zener downgraded PulteGroup (NYSE:PHM) and Taylor Morrison Home Corporation (NYSE:TMHC) to Sell from Neutral, citing an approximate 15% downside with risks potentially higher due to their significant exposure to the Florida market. Furthermore, he adjusted the price target for Meritage Homes Corporation (NYSE:MTH) to $70, noting their higher exposure to speculative closings.
The update from Seaport also included an upgrade for LGI Homes (NASDAQ:LGIH) to Neutral from Sell, reflecting a valuation-based decision. Additionally, D.R. Horton's (DHI) estimates were updated following its recent earnings release. The series of rating changes by Seaport Global Securities reflects a nuanced view of the housing sector as it navigates through various economic and market conditions in early 2025.
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