Evercore ISI sees significant upside in homebuilder stocks

The SPDR S&P Homebuilders ETF had a dovish start to the year, but Evercore ISI’s Stephen Kim is confident 2022 will be a good year for the homebuilder space.

Kim’s outlook on the construction space

According to Kim, higher volatility could make it a challenging year for equities in general, but he still expects homebuilder stocks to outperform in 2022. On CNBC’s “Power Lunch”, he said:

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We see so much upside in the earnings in this group relative to what the Street is looking for, that we think these stocks have significant upside. Many of the homebuilder stocks, even with our reduced multiple targets, show 50% upside from here. That’s just too much to pass up.

His top picks within the sector include PulteGroup Inc, Lennar Corp, and D. R. Horton Inc – all of which had a good run in 2021, but he sees the rally continuing this year.

Higher rates won’t be a threat

The U.S. Federal Reserve is expected to raise rates multiple times this year, which Kim agreed is not a favourable backdrop for the homebuilding space but said:

Remember, the demand for housing is motivated by need, not greed. Nobody wants to buy a house if they don’t have to. Speculation in the market is still very contained. So, if market demand is driven by need and not greed, it’s going to be much more resilient to rising rates than otherwise.

Supply constraints weighed on earnings for the homebuilders in the latest reported quarter, but Kim expects that to change in 2022. Construction cycle times, he added, are unlikely to widen this year, which could serve as another catalyst for this sector.