Toll Brothers upgraded as J.P. Morgan adopts more favorable view on homebuilders (updated)

RichLegg

J.P. Morgan analyst Michael Rehaut upgraded homebuilder Toll Brothers (NYSE:TOL) to Overweight and downgraded M.D.C. Holdings (NYSE:MDC) and Century Communities (NYSE:CCS) to Underweight as he moves to a more favorable risk-reward balance for the sector, overall.

In addition, the analyst upgraded Green Brick Partners (NYSE:GRBK) to Neutral, "as we believe its relative valuation premium, trading at 8.2x our 2023E EPS and 1.07x current P/B vs. its smaller-cap peers' averages of 7.6x and 0.77x , respectively, appropriately reflect our outlook for above average operating margins and ROE in 2023," he said. (Updated 1:28 PM ET)

With a mild recession already priced into homebuilder stocks, the Federal Reserve's expected end to its tightening cycle in the first half of 2023 would provide a positive catalyst for the group, Rehaut said in a note to clients.

Note that though Fed officials don't predict when they'll stop raising rates, the majority of policymakers expect rates to peak in 2023, according to their last summary of economic projections' dot plot. The end of the rate-hiking cycle could "allow for interest rates to decline from current levels over the next 12 months and hence be a significant positive catalyst for the stocks," the analyst wrote.

See how key metrics for Toll (TOL), M.D.C. (MDC), Green Brick (GRBK) and Century Communities (CCS) compare with some of their peers in this table.

SA contributor Paulo Santos, taking a contrarian view, explains why he thinks TOL stock hasn't fallen far enough