KeyBanc just raised the alarm on homebuilder stocks

Shares of Lennar Corporation (NYSE: LEN) have come down roughly 10% this month, and KeyBanc Capital Markets says the road is likely to remain bumpy in the coming months as well.

Zener sees a 15% downside in Lennar Corp

In a note this morning, KeyBanc’s Kenneth Zener downgraded Lennar to “underweight” with a price target of $86 a share that represents a close to 15% downside from where the stock closed on Tuesday.

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According to the analyst, the homebuilder is unlikely to do well in 2022 as the U.S. Federal Reserve moves to raise rates at least four times to tackle record levels of inflation. He wrote:

Builders’ stocks face a wall of worry as 2022 begins, as a tightening monetary outlook negatively affects sentiment, COVID-induced inflation and supply constraints compound lagged money supply trends. And past home price gains that elevated margins will likely abate.

On the contrary, Morningstar’s continues to be optimistic about LEN.

Other names Zener downgraded on Wednesday

Zener’s reasons for being dovish on Lennar are macroeconomic in nature. Naturally, therefore, he expects them to hit other housebuilders as well, including D.R. Horton, KB Home (NYSE: KBH), Toll Brothers, TopBuild, Installed Building Prods – all of which he downgraded on Wednesday.

Tightening cycles impact builders’ stocks, with stocks falling 32% peak to trough, down 89% of the time since 1969. We think builders’ operational success can’t offset cyclical tailwinds ebbing (low supply, low rates) in time.

Last week, KB Home said its revenue came in shy of Street estimates in the fiscal fourth quarter. The KeyBanc analyst has a price target of $38 on KBH or more than 10% below its current price. The SPDR S&P Homebuilders ETF (XHB) is down over 10% for the year.