The Silent Boom in Building Stocks
Wednesday, August 27, 2008 | Teeka TiwariRating:
Editor's Note: Our weekly telephone call to answer your questions has been posted. Listen now to hear Teeka answer more reader questions; including ...
- Consumer stocks seem to be holding up in this market. Will the rally last?
- Home prices are still dropping and there are new reports that there is still a lot of mortgage fraud going on. When will this housing debacle end?
- Citibank told employees to stop using the color copier because it costs too much money. Sounds pretty grim. Do you think Citibank will go under?
Wow, the pain in housing continues unabated. Fannie (FNM) and Freddie (FRE) are knee deep in the muck and are tightening lending standards at the absolute wrong time in the cycle. Even with explicit government guarantees these guys are wrapped in a cloak of fear and doubt.
One of my top indicators that I look at is the Case-Schiller index. I like it because it tracks housing prices in the top metropolitan areas. These are the sections of the country that had the biggest gains and are now experiencing the biggest losses. This is where the real pain is taking place and, when the dust settles, where a killing can be made during the next boom.
Case-Schiller is showing a slowdown in housing declines but home prices are still off about 15% year over year. In Vegas and Miami it is far worse, the average property is down 28% over the last year! I don’t care how much money you have, a 28% hit is a shot to the gut. It’s not all gloom and doom though. Areas such as Charlotte, NC and Dallas have shown consecutive months of rising real estate prices!
But the guys really getting killed right now are the builders. New housing starts are down an astonishing 35% year over year. But a quick look at the builder stocks tells a different story. Rather than wallowing down at multi-year lows, they’ve shown some real life of late. Beazer Home (BZH), MDC Holdings (MDC) and Meritage Home (MTH) are still beat up, but they are way above the bottoms they put in over the summer. (BTW take a closer look at the relative performance of MTH, it has been astonishing!)
But the real money is being made in the building materials stocks rather than the builders themselves. Stocks like TREX (TWP) are actually doing very well indeed, with the stock being up over a 100% in the last six months alone. Even boring old Beacon Roofing Supply (BECN) is up an impressive 61% over the last six months.
When looking at plays in this space, it pays to think outside of the box. You want companies that do well in the environment that we are in or companies that do well regardless of the environment.
One such “off-the-beaten track” company is Hill International (HIL). They provide consultative and project management services to the construction industry. They get involved with all different types of construction, government and private. Over the last six months, Hill is already up almost 40% in one of the worst real estate pullbacks in history. Being diversified is really helping Hill stay on top of the competition.
As you know, I’m a big fan of relative strength and actual performance of a stock, especially during a market downturn.
Do you know how to measure Relative Performance? If not, take a look at my New ETF Master Trader: Online Edition. You’ll get ten weeks of intensive investor education for free with an annual membership to my Completely Automated Sector Hunter.
So what’s going on here in the construction market?
Government-funded construction still looks to be in full swing. International heavy industrial construction is still going strong. On the consumer front, many buyers have been stymied in their efforts to secure a bigger house by the twin forces of lower overall housing prices -- making their house more difficult to sell -- and stricter lending standards. It looks like instead of buying new, larger or second homes, homeowners are improving their existing homes.
This goes a long way in explaining the stark dichotomy between the headlines that are blaring about the end of the real estate market and the reality of where consumers are now putting their dollars.
(Please let us know what you think about Teeka Tiwari's article.)
Rate his article here »
Rate his article here »
Teeka Tiwari
Chief Investment Officer
ETF Master Trader
