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Zacks Investment Research upgraded Ryland Group, Inc (RYL - Snapshot Report) to a Zacks Rank #1 (Strong Buy) on Jul 6. Share price surged on the back of a strengthening homebuilding market and a bright outlook for the year.

Why the Upgrade?

Stocks of homebuilders like Ryland, Lennar Corporation (LEN - Analyst Report), PulteGroup Inc (PHM - Analyst Report) and D.R. Horton, Inc. (DHI - Analyst Report) have rallied strongly since mid-2012 as the U.S. housing market has seen significant upside in new home construction activity. The housing market has steadily made a comeback from the lows witnessed in mid-2006 caused by the severe and widespread downturn.

Despite recent concerns over rising interest rates, U.S. home demand is increasing as increased rentals and historically low mortgage interest rates have improved the affordability of homes. Moreover, a sense of urgency to buy a new home before interest rates shoot up further is also pushing up demand. However, supply remains limited by low home inventories, both for new and existing homes. Home prices have thus moved up sharply with market demand gaining momentum and supply remaining limited.

Large homebuilders like Ryland are thus witnessing increasing traffic levels due to heightened consumer demand. Most homebuilding companies are witnessing significant growth in both volumes and average selling prices.

Ryland’s first quarter fiscal 2013 earnings of 43 cents per share increased significantly from the year-ago loss of 7 cents. Ryland’s revenues in the quarter surged 73.6% year over year on the back of an increase in homebuilding revenues. More importantly, new orders jumped 54.4%, while backlog rose 57.2%. The average backlog price rose 15.6% to $289,000.

In fact, Ryland has beaten the Zacks Consensus Estimate in all the past four quarters with an impressive average earnings surprise of 26.29%. Housing market recovery along with Ryland’s excellent fundamentals and its aggressive land acquisition strategy is driving the share price higher. Ryland has been aggressively buying land and has invested nearly $1 billion for this purpose over the last 2 years. We believe its significant land positions, broad geographic and product diversity and a better capital position will enable it to take maximum advantage of the housing recovery.

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