Investors should be selective in buying homebuilder stocks because the sector faces profitability risks even though the housing market is healthy, housing analyst Ivy Zelman told CNBC on Tuesday.
The Zelman & Associates founder and CEO said she is bearish on the sector and put a hold on names such as PulteGroup Inc., Toll Brothers Inc. and D.R. Horton Inc.
“Because I think … what you’re going to see with the builders is that their pricing power is much more challenged but their costs are all rising,” she said on “Fast Money Halftime Report.” “So profits are where you’re going to get the squeeze.”
Zelman suggested traders can still make picks on stocks that have been “way oversold.” Her firm has buys on names such as KB Home and Lennar Corp., which could do well even if housing doesn’t boom, she told CNBC. Lennar, which is down nearly 40 percent in the past year, can outperform the market as homebuilders run into months of uncertainty.
“I think Lennar, because of … what we think is the best operations, the strong cash flow they’re going to generate, they’re buying back stock,” she said.
The firm is also recommending Masco and Fortune Brands, which she says have been substantially discounted.
Shares of Lennar are trading down more than 1 percent before Tuesday’s close.
Zelman said housing is a “tale of two markets,” where there is more demand for lower-priced homes than high-end homes.
Homebuilder sentiment ticked up in January after two months of sharp declines, but increasing costs have stunted construction of lower-priced homes that are less likely to turn a larger profit. Home prices had an annual gain of 5.1 percent last November, the smallest increase in almost four years.