We are on the brink of a potentially epic economic change.
Fortunately, this is unlikely to be a "
swan" event that rattles the markets from
. 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
forever change the economic landscape.
To prop up the U.S.
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 ready
and quantitative easing measures. Now that the economy is back on
has signaled its intention to throttle back on quantitative
easing, likely to the point of elimination.
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-free
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 the
market. The average 30-year
has climbed to around 4.15%.
How Can Investors
On the Epic Change?
While there are many ways one might
from rising interest rates, I like the idea of buying
homebuilders right now. Yes, you read that correctly -- buying
Obviously, rising interest rates are not a good thing over the
for homebuilders. However, over the next
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 Housing
. Any reading over 50 indicates more builders are positive about
condition than negative. June marked the first time since
September 2002 that the
has advanced as many as 8 points.
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%
in the S&P 500. Not to mention that the National Association
of Homebuilders forecasts total
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 a
of over $880 million with a total
of $2.45 billion. With year-over-year quarterly
growth of nearly 24%, annual revenue of $1.6 billion, and a
of more than $214 million, Hovnanian has a solid
In the technical picture, HOV has just slipped from its high,
creating a channel entry opportunity. I like this
on a breakout above
in the $6.40 area or a breakdown to
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.
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 any
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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