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Zacks Investment Research downgraded PulteGroup, Inc. (PHM - Analyst Report) to a Zacks Rank #5 (Strong Sell) on Sep 7, following the recent bearish housing data releases. Moreover, the national homebuilder reported weak second-quarter results, which have caused its shares to lose significant value.

Why the Downgrade?

Estimates have been going down ever since Pulte reported weak second-quarter results on Jul 25. Pulte’s second-quarter 2013 earnings of 26 cents per share more than doubled from last year, but lagged the Zacks Consensus Estimate of 29 cents by 10.3%. Revenues also missed the estimates due to disappointing net order growth.

Net orders were weak due to a lower community count as the company actively slows down sales pace in some communities due to lack of land development and scarcity of finished lots. The company is focusing more on driving price and margin rather than pushing up unit volumes. This, we believe, has affected net order growth in the quarter. Rising mortgage rates also had a negative impact on order trends in 15% of Pulte’s communities. Pulte’s net order decline was a sharp contrast to double-digit increases reported by other large homebuilders; thus raising concern.

In fact, the company saw a similar net order trend in July as well with no major change in traffic levels and sign ups /cancellation trends. Net orders are expected to remain soft in some future quarters.

Moreover, a spate of weak housing data releases since late July has created volatility in the homebuilding market. In late August, new home sales were reported to have dropped a sharp 13% in July, causing many homebuilding stocks like Pulte to lose value (Homebuilders Slump on New Home Sales Data).

Moreover, data published by the National Association of Home Builders in mid-August showed that housing starts across the U.S. rose 5.9% in July.  However, though starts for multi-family construction rose in the month, those for single-family construction declined 2.2%, narrowing from the positive growth seen in June (Housing Starts Rise in July). This news also pulled down share prices of homebuilders like Pulte which are mostly involved in constructing single-family homes.

Other Stocks to Consider

Some homebuilders with a favorable Zacks Rank are performing well and are worth considering. These include Standard Pacific Corp. (SPF - Snapshot Report), TRI Pointe Homes, Inc. (TPH) and Meritage Homes Corporation (MTH - Snapshot Report). All these companies carry a Zacks Rank #2 (Buy).

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