Several US residential builders' stocks fell on Tuesday after Citigroup lowered its ratings on Lennar Corp (LEN.US) and D.R. Horton (DHI.US), citing the possibility of a sluggish US real estate market for the remainder of the year.
Citigroup downgraded Lennar Corp from "buy" to "neutral", lowered its target price from $174 to $164, and also downgraded D.R. Horton from "buy" to "neutral" and lowered its target price from $181 to $156. Citigroup also lowered the target price of Forestar Group (FOR.US), PulteGroup (PHM.US) and Toll Brothers (TOL.US).
Analysts believe that they think that "soft data" could continue into the second half of this year, with recent housing permits, starts, sales and prices all lower than expected.
Despite the expected Fed rate cut as a catalyst for an economic rebound in the second half of the year, analysts point out that "history shows that the stock market does not always rebound during a rate cut cycle."
Although both Lennar Corp and D.R. Horton have "many praiseworthy aspects", including strong cash flow, analysts believe that the "risks and returns over the next six months are roughly balanced."
At Tuesday's close, Lennar Corp fell nearly 2%, D.R. Horton fell more than 1%, and their stocks fell to their lowest levels since December last year. The stocks of the other three residential builders whose target prices were downgraded by Citigroup also fell.