Stay Away From Homebuilder Rally, Goldman Sachs Says

Tickers in this article: KBH LEN MDC MTH PHM RYL TOL

BOSTON (TheStreet) -- The housing industry is healing, but Goldman Sachs analysts recommend that investors steer clear of the rally in homebuilders such as Lennar and PulteGroup .

The SPDR S&P Homebuilders ETF has risen more than 30% over the past three months. Even JPMorgan Chase CEO Jamie Dimon said "housing is at or near the bottom" during an interview on CNBC Monday afternoon.

Not so fast, says Goldman Sachs analyst Joshua Pollard. While the housing sector may be gaining its footing, the improvements are lagging valuations.

"With homebuilding stocks outperforming the market by 3,500 basis points in the last three months, we would wait for a pullback or a clearer picture that housing is healing quicker than it currently is," Pollard writes.

Among homebuilders, Pollard says his team at Goldman prefers PulteGroup because of its turnaround story as well as Toll Brothers , which he calls best in class. Pollard increased his price target on Pulte to $8, an increase of 23% from his previous target, and he raised his target on Toll by 9% to $24.

Pollard also hiked his price targets for several other homebuilders. The price target on KB Home went to $7.50 from $6.50. Lennar's moved to $18 from $14.50, while MDC Holdings' inched up to $20 from $18. Pollard raised his target on Meritage Homes to $23 from $18, and increased Ryland Group's to $13 from $11, although he maintained a "sell" rating on Ryland.

-- Written by Robert Holmes in Boston.

>To contact the writer of this article, click here: Robert Holmes.

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Tickers in this article: KBH LEN MDC MTH PHM RYL TOL