Homebuilders are knocking on the door again
There are some groups of stocks that are the never-ending object of our attention for months and years on end, and then something happens and you gradually stop looking -- and ultimately they are so out of the picture you can't even remember their symbols.
That's the way I feel about the home-builders, which were the be-all and end-all of awesome stock groups in the 2002-2005 period, just going up every single day and doubling, tripling, quadrupling your money. And then the top of the residential real estate bubble came in 2006 and they all tumbled 70% to 95% over the next two years.
After that it was interesting to see them lift a little off the mat in 2009-2010, but now they are the Forgotten Island of stock groups. I used to trade Pulte Homes (PHM), Standard Pacific (SPF) and Meritage Homes (MTH) and Hovnanian (HOV) all the time ten years ago, but had to look up the tickers today when checking in on them.
So why was I ringing the doorbell? Well, hey, they are perking up again. For seemingly the nineteenth time in the past few years it seems like they might finally get rolling again. They probably won't but at least they have stopped just lying there like doormats.
Here's why they have been woken up as story stocks the past five days -- up 6% as a group last week despite the broad market decline of 1% -- with analysis courtesy of I S I Group.
-- Benchmark bond yields declined 8 basis points to just 2.20%, pushing down mortgage rates to 3.95%, their first time back below 4.00% since their taper-tantrum surge.
-- Prospects of Fed tightening were pushed back significantly. Regional Fed chiefs Bullard and Williams discussed prospects of more quantitative easing, which would mean more mortgage-backed securities buying.
-- Fannie Mae and Freddie Mac (remember them?) announced they are set to loosen lending rules. (Uh oh).
-- Unemployment claims declined to a 14-year low last week, indicating that employment has continued to increase, which is a strong positive for housing.
-- Housing starts increased +6% in September.
-- There were more reports of foreign buyers surging into residences and commercial properties from New York City to Arcadia, Calif. One real estate pro was quoted as stating, "Chinese buyers are going crazy, deals happen fast.")
-- The improving employment trend for people aged 25 to 29 should soon be reflected in more "household formations," which is the way economists describe people getting married and having kids. An increase in household formations is a huge positive for home construction.
Looking forward: If one of the worst performing industries in the country can improve, it will drag a lot of other industries higher along with it. We know this cycle well. Better home construction means higher sales for hardware chains like Lowes (LOW) and Home Depot (HD) and wholesalers like Fastenal (FAST); for swimming pool product makers like SCP Pool (POOL); for lawn care manufacturers like Toro (TTC); for garage door opener makers like Griffon (GFF); and even for snowmobile makers like Polaris Industries (PII); roof makers like Beacon Roofing(BECN); and aggregate, paving rock, cement and wallboard suppliers like Express Materials (EXP) and Vulcan Materials (VMC).
These are not recommendations, just a concept to keep in the back of your mind in case they really perk up and start to move. At present, by our measure only Home Depot shares in this group are actually cheap, with about 26% potential upside.
Source: Markman Capital Insight