If you keep a close eye on the stockmarket and theeconomy , then
it's crucial that you tune out the daily noise. There are so many
data points we process that give the impression of a long-term
trend, even if it's really just a short-term shift.
A few examples come to mind…
The U.S. economy
For anyone tracking the market this summer, you would think its
rising value reflects a brightening economy. Instead, the recent
gains are largely attributable to expected imminent action from the
Federal Reserve and a quiet phase for the European crisis. A
broader look at the U.S. economy, extended over a number of
quarters, reflects little of the joy the market seems to be
Foreclosures on the rise
Another disconnect appears to be emerging among housing stocks,
which have rallied sharply for nearly a year. The housing market
indeed appears to have hit bottom, and in some markets, home prices
have ticked up a bit. But in many respects, this is still a
troubled sector, characterized by many foreclosed homes that have
yet to hit the market.
The future of the housing market
In all likelihood, the housing market will be truly healthy -- by
the middle of this decade. Yet share prices of many homebuilders
appear to reflect much stronger sales activity in 2013. Considering
the myriad headwinds in place right now, it's simply hard to see
how consumers are on the cusp of a major mood change. And if
housing activity fails to take off in coming quarters, then these
stocks look awfully ripe for a pullback.
Even if you are a believer in a big-time housing rebound for
2013, you still need to tread carefully with these stocks after
such strong gains. That's the view of JMP Securities' Peter Martin,
who thinks this recent rebound in the housing market is legit:
"Over the past two years, the market has experienced several false
starts with regard to sustained positive movement in the economy
and the housing cycle. However, in our view, this current move
appears to have 'real legs' given the breadth and extended
timeframe of the spring selling season, velocity in which foreclose
homes are being cleared from the market, and current pricing for
Yet, even with the fairly positive view, he still says you
should brace for a reversal in the housing market. He recently
reinitiated coverage of the sector and found few bargains.
Among his pans:
Beazer Homes (NYSE:
He foreseesshares falling by half to a $1.50price target . He's
concerned that Beazer is likely to keep losing money throughout
2013, and will need to conserve cash, right at a time when flusher
rivals can accelerate their long-term landacquisition plans.
Hovnanian Enterprises (NYSE:
Martin foresees a strong decline of more than 60% from a recent
$3.20 a share, as the company faces a possible cash crunch that
lead to the issuance of more shares. As of June 30, Hovnanian had
$400 million in cash against $1.6 billion in debt. Projections of
continued near-term losses will only weaken thebalance sheet
The analyst goes on to suggest that most other homebuilder
stocks are fairly valued, but none look like "buy" candidates,
except for one stock:
Toll Brothers (NYSE:
, which should see a steady upturn in demand, thanks to its focus
on well-heeled home buyers looking to take advantage of current low
homemortgage interest rates. He notes that "TOL's integrated
operating model and balance sheetoffer greater flexibility than its
peers," and he foresees shares trading up nearly 17% from a recent
Risks to Consider:
As an upside risk, the direction of the housing market
depends heavily on employment trends, so if monthly payrolls start
growing at a much faster clip than we've seen recently, then these
surging housing stocks could keep moving higher.
Action to Take -->
Although the U.S. economy doesn't look headed for hard times, it
doesn't look to be building a robust head of steam in 2013, either.
That's why it's wise to keep expectations in check, and book
profits in any sectors that already appear to anticipate better
days ahead, as is the case with the housing sector.
-- David Sterman
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.
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