SET Monthly Issue February 2016

| February 2, 2016

Finances, Floor Plans, And A Flood Of First-Time Home Buyers

There are at least two schools of thought on the homebuilding business.

Possible interest rate increases will spur more buyers to buy a home before mortgage rates go up even more.

Or the increases – if they hit – will blockade buyers and slow the homebuilding business down.

It probably doesn’t matter which one of these scenarios plays out.  That’s because we do not anticipate a significant increase in interest rate hikes this year.  By the end of 2016, we don’t see a mortgage costing much more than it does today.

What probably does matter more than the actual rate is how tough it is to get a mortgage.

The pendulum appears to be swinging.  Borrowers are not being put through the tough hoops to qualify they’ve faced over the past few years.

The challenge is the ability to accurately measure pent-up demand.  How many people who couldn’t make it through the mortgage application maze the past seven years are back in the market?

Credit quality demands are definitely loosening.  And this could easily ignite demand.

That’s the perspective from the homebuyer side of the equation.  What about the homebuilder?

The National Association of Homebuilders and Wells Fargo track the “sentiment” of homebuilders and report it monthly.

The preliminary results reported for January 2016 are the same as December, but off a bit from October.  It’s stronger than the same time last year.

And this is why we see more good times ahead for the homebuilding business.  It’s why now is a good time to invest in the SPDR® S&P Homebuilders ETF $XHB.


Trade Alert: Homebuilding

This ETF gives you exposure to the nation’s largest homebuilders… and more.

Three Ways To Profit

$XHB is essentially three complimentary sectors in one.  You get the actual homebuilders, the companies that manufacture the products homebuilders use, and companies that homeowners turn to for furniture and decorations.

#1.  The Homebuilders

The #1 homebuilder stock that the SPDR® S&P Homebuilders ETF tracks is PulteGroup Inc. $PHM.

Pulte builds and sells homes under three brands names – Pulte, Del Webb, and Centex.

The business model is simple.  Buy land, carve it into lots, build model homes, and then build homes for a buyer once a contract has been signed.

Pulte controls more than 130,000 lots.  Most it owns, and some it options.

Pulte might be a leading homebuilder, and the #1 homebuilder in the ETF, but it’s been through a rough stretch.  Pulte has been a drag on the recent performance of $XHB.

Pulte’s stock was down 15% in 2015.  The problems:  in some markets, getting both construction crews and supplies to finish homes on time.  In other markets, there’s been soft demand for new homes.

One challenge Pulte faces is shared by just about all the homebuilders in the ETF.

Nowadays, it’s harder to build a home and make a good profit.  There’s pressure on margins because of rising costs for labor, land, and building materials.

Other homebuilders the ETF tracks include D.R. Horton $DHI, Lennar $LEN, and Toll Brothers $TOL.

The volume leader in 2015 was DH Horton, which sold more than a hundred new homes every day.

#2.  The Manufacturers

These are the companies that flourish when new homes are built…

Armstrong $AWI supplies material for flooring and ceilings.

Lennox $LII provides heating, cooling, and ventilation systems.

Owens-Corning $OC is in the roofing and insulation business.

Mohawk Industries $MHK manufactures and markets carpeting.

Fortune Brands $FB designs, manufactures, and distributes hardware and fixtures.

#3.  The Retailers

Surprisingly, the two largest stocks the ETF tracks aren’t homebuilders or manufacturers.  They are retailers.

Home Depot $HD and Lowe’s $LOW represent more than 9% of the ETF.  When these two stocks do well, so does the ETF.  And right now, these are two excellent stocks.

Each company is well-managed and well-positioned for the years ahead.

Each stock was a winner in 2015.

Other retailers this ETF tracks include Bed Bath and Beyond $BBBY, Restoration Hardware $RH, and Williams Sonoma $WSM.

This is one of the key reasons why we’re recommending the SPDR® S&P Homebuilders ETF $XHB.

Fundamentals:  A Closer Look At $XHB

$XHB currently holds 35 stocks weighted according to market-capitalization.  It has a net expense ratio is 0.35%.

Dividends… not much to write home about at 0.81%.  If you’re looking for an ETF that’s a solid dividend performer, look elsewhere.

Could dividends grow?  Perhaps, but we do not except dividend growth to be significant.  But here’s what is significant about $XHB.

We like the diversification that comes with three sectors in one.  A bad day for Pulte can be a good day for Williams Sonoma.

When you look at the top five holdings, you’ll see this diversification quantified.  It’s not unusual for some ETFs to reveal a single stock that represents more than 10% of the portfolio’s total value.

This isn’t the case with $XHB…

The top five holdings and percentage weight for $XHB are –

Company Name Ticker % Weight
Lowe’s Companies Inc. LOW 4.88%
Home Depot Inc. HD 4.84%
Pulte Group Inc. PHM 4.68%
Owens-Corning Inc. OC 4.65%
Whirlpool Corp. WHR 4.59%

Technicals:  The Story We See In The Chart

$XHB is currently trading at $29.95, and like just about every other ETF, it’s off its recent highs.

SPDR S&P Homebuilders ETF

It’s trading below its 50-day moving average, and we believe it’s attractively priced.   The P/E ratio is a conservative 15.

Trade Alert

Buy:  SPDR® S&P Homebuilders ETF $XHB up to $31.00

Recent Price:  $29.64

Price Target:  $50.00

Stop Loss:  $27.00

Sector Snapshots

Consumer Discretionary (-3.5%)

Consumer discretionary stocks are in a holding pattern, not necessarily a bad thing given the market’s overall performance in January.

Our Market Vectors Retail ETF $RTH is currently trading at $78.83, reflecting a modest gain of 0.76% and below our $77.50 buy up to price.  Hold.

Consumer Staples (+5.1%)

We picked up a handsome 5.1% gain with the Consumer Staples Select SPDR $XLP which we recommended last month.  We’re above the buy price.  Hold.

Energy (-3.8%)

You’ll remember that we liquidated our position in the Vanguard Energy ETF $VDE when it sank below our $82.50 stop loss.  January saw more declines.

This is not a sector we’re rushing to return to, although there may soon come a time when the supply and demand dynamics are more attractive.

Financials (-7.1%)

Financials retreated again in January.  The overall market downdraft, accompanied by a growing consensus that 2016 will not be a year of significant interest rate increase, pushed performance lower by 7.1%. 

Healthcare (-6.5%)

After two months of gains, healthcare stocks quieted down in January.  The sector was off 6.5%.

Our iShares US Medical Devices ETF $IHI has weathered the storm well, down by 2.7%.  Hold.

Industrials (-4.4%)

Overall, industrials gave up 4.4% in January.  Our US Global Jets ETF $JETS was harder hit than the broad category, suffering a 7.3% decline.

We are concerned.  When fuel costs are low, we need to see stronger performance from this ETF.  Top holdings include American, Delta, Southwest, and United.

But global uncertainties are clearly taking their toll, and we will be watching this ETF with particular interest.  Hold.

Technology (-8.7%) 

We recently recommended the First Trust Dow Jones Internet Index Fund $FDN… it’s off to a rugged start, down 8.7% in January.  We remain committed to the sector and to the ETF, and anticipate stronger performance in the months ahead.  Hold.

Utilities (+6.2%)

Utilities did well in January. Our Utilities Select Sector SPDR $XLU was up 6.2% for the month.  Hold.

Portfolio Changes

  • This month we’re buying $XHB.

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