We are on the brink of a potentially epic economic change.
Fortunately, this is unlikely to be a "black swan" event that
rattles the markets fromMain Street toWall Street . It is also
not likely to be a sudden shock that quickly dissipates, leaving
everything about the same as before. I am talking about a fully
controlled, incremental long-term shift thatwill forever change
the economic landscape.
To prop up the U.S.economy after the financial crisis, the
Federal Reserve used monetary tools such as dropping interest
rates to the lowest levels in history and flooding the markets
with readycash and quantitative easing measures. Now that the
economy is back on track,the Fed has signaled its intention to
throttle back on quantitative easing, likely to the point of
In addition, interest rates have started to spike.
This is a long-term change that is currently in its infancy:
the economy's reversion from a government-supported
quasi-freemarket to the largely self-supported free market it was
prior to the financial crisis. What this means is that we can
expect interest rates to continue to increase.
With the Fed showing signs of easing its grip on interest
rates, rates have nowhere to go but up. The everyday economy is
feeling these rate increases in themortgage market. The average
30-yearmortgage rate has climbed to around 4.15%.
How Can InvestorsCapitalize On the Epic Change?
While there are many ways one mightprofit from rising interest
rates, I like the idea of buying homebuilders right now. Yes, you
read that correctly -- buying homebuilderstocks .
Obviously, rising interest rates are not a good thing over the
longterm for homebuilders. However, over the nextyear or so,
rising rates should force aspiring homeowners into a purchase
decision, spurring growth in this sector.
In other words, new homeowners who want to lock in rates while
they're relatively low will do so sooner rather than later as
rates inch higher. Fortunately, rates usually move incrementally
rather than in big jumps. This incremental movement will allow
time for homebuyers to make their move, while at the same time
providing strong impetus for a rapid decision.
Supporting this theory, homebuilder confidence hit a
seven-year high in June, with a reading of 52, according to the
National Association of Homebuilders/Wells Fargo HousingMarket
Index . Any reading over 50 indicates more builders are positive
aboutsales condition than negative. June marked the first time
since September 2002 that theindex has advanced as many as 8
Homebuilder stocks are reflecting this optimism being well off
their lows while setting up for potential buys. In fact,
homebuilder stocks have strongly outperformed the broad market.
Over the past year, the S&P Supercomposite Homebuilding Index
has soared more than 60%, compared with about a 22%gain in the
S&P 500. Not to mention that the National Association of
Homebuilders forecasts totalhousing starts will rise 29% this
year from last year.
Add in the powerful buying impetus of rising rates, and the
homebuilder sector should continue to outperform. Here are my two
Hovnanian Enterprises (
This residential homebuilder boasts amarket cap of over $880
million with a totalenterprise value of $2.45 billion. With
year-over-year quarterlyrevenue growth of nearly 24%, annual
revenue of $1.6 billion, and a trailing 12-monthgross profit of
more than $214 million, Hovnanian has a solidbalance sheet
In the technical picture, HOV has just slipped from its high,
creating a channel entry opportunity. I like thisstock on a
breakout aboveresistance in the $6.40 area or a breakdown
tosupport in the $5.80 range.
This homebuilder boasts a market cap of over $7 billion with a
total enterprise value of more than $11.4 billion. Lennar's
financials are solid: year-over-year quarterly revenue growth of
nearly 37%, annual revenue of more than $4.3 billion, and
trailing 12-month gross profit of close to $600 million.Net
earnings climbed to 26 cents a share in the latest quarter from
just 8 cents in the same quarter last year. Operating margins
improved by more than 4% in the same time.
Technically, the price of LEN, although off its lows, has
fallen into a channel, creating potential buy setups. I like this
stock on a breakout above the upper channel line in the $39.50
range or a breakdown to the lower channel at the recent lows in
the $37 area.
Risks to Consider:
The government's withdrawal of its massive economic support
programs will have long-term implications for everyone. Although
rising interest rates could well spur would-be homebuyers into
purchasing, high interest rates will probably have negative
effects on homebuilders. Remember, we are in uncharted territory
economically. Use caution when making anyinvesting decision, and
always use stops and position size properly.
Action to Take -->
I like both Lennar and Hovnanian right now provided the entry
parameters listed. My 12-month price targets are $8 for Hovnanian
and $44 for Lennar.
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