The Sector Outgunning Tech
The sector crushing tech in the market-rebound … what’s behind the surge … one of Louis Navellier’s stocks is benefitting … how you can find similar winners
While tech’s returns are capturing the headlines, did you know there’s another sector that has crushed tech in the post-March market rebound?
I’m talking by a margin of nearly 100% …
To be fair, this sector fell much further than tech in the Feb/March market collapse. But the point remains …
It’s trouncing tech in the rebound.
Got your answer?
***Congrats if you guessed “housing stocks”
To illustrate, let’s start with XLK. This is the SPDR Technology Select ETF.
Its largest holdings include some of the biggest tech-winners of the year — Apple, Microsoft, NVIDIA, PayPal, and Salesforce.com to name a few.
Let’s compare XLK to ITB, which is the iShares U.S. Home Construction ETF.
It holds homebuilders and home improvement companies, including D.R. Horton, Lennar, Home Depot, Lowe’s, and Sherwin-Williams.
Below, you’ll see XLK and ITB since the market’s late-March lows.
While XLK has climbed 69%, ITB has practically doubled that, returning 136%.
***On Friday, we received news highlighting what’s helping drive this surge
U.S. existing-home sales soared 24.7% in July.
That’s the highest growth rate since December 2006. It also shatters the 14.2% growth rate that economists had forecasted.
From Lawrence Yun, the chief economist of the Nation Association of Realtors:
The housing market is actually past the recovery phase and is now in a booming stage.
Now, you might be saying — “Jeff, that stat is about existing home sales, not new home sales, which would relate more to homebuilders.”
True. But remember, ITB holds home improvement companies like Home Depot as well.
And to the broader point, the mass demand for existing home sales is highlighting a shortage in homes on the market. And this is fueling a surge of new home construction.
Demand for housing continues to swell, held back only by the severe shortage of homes for sale. Homebuilders are ramping up production, and mortgage applications for newly built homes are surging even higher.
On Friday, The Wall Street Journal noted that current housing supply is so limited, that there was just a 3.1-month supply of homes on the market at the end of July.
For context, below is the “Monthly Supply of Houses in the United States” from the Federal Reserve of St. Louis.
Though the supply has fallen near the 3.1 level a handful of times, this is the lowest reading we’ve seen since 1990.
(The chart hasn’t updated yet to reflect the latest 3.1 reading, which is why the line doesn’t appear to have dropped to the lowest point in the data series.)
Clearly, this is a bullish environment for home builders. From the WSJ:
New-home sales, which make up about 10% of the market, have also roared back this summer.
A measure of U.S. home-builder confidence rose in August to match the record high last reached in 1998, the National Association of Home Builders said Monday.
Housing starts, a measure of U.S. home-building, rose 22.6% in July from June, the Commerce Department said Tuesday.
Residential permits, which can be a bellwether for future home construction, rose 18.8%.
***It was last September that Matt McCall, editor of Investment Opportunities, was alerting his subscribers to this opportunity
Inventory, or the number of homes for sale, has been on the downswing for years (see the blue line on the chart below). A recent rollover on the chart suggests the amount of homes on the market will continue to fall.
At the same time, the number of U.S. housing starts (the orange line) has increased for the last decade.
The inverse relationship makes sense. As the number of homes for sale falls, homebuilders are incented to build new homes.
The result is higher revenue for homebuilders, leading to higher stock prices. This is precisely why housing stocks recently broke out to their best level in over a year.
Matt then touched on the decline in mortgage rates, summarizing with this:
Here’s the takeaway for us: Over the last 10 years, when mortgage rates fall to this level and home inventories turn lower, investors make money in housing stocks.
Since Matt’s issue last September, ITB has outpaced the S&P by roughly 140%.
And since our June 18 Digest, titled “Buy the Housing Boom” in which we profiled ITB, the ETF has tacked on 25% compared to the S&P’s 10%.
***As noted above, it’s not just homebuilders that have been benefiting — home improvement companies have been surging too
Take Home Depot, another holding within ITB. It’s actually one of the market’s top-performers here in 2020.
As to “why?” here’s Mortgage Professional America:
As a result of the coronavirus shutdown that has forced people to stay put in their homes, Americans have become motivated to tackle home renovation projects this year.
Around 73% of homeowners want to make home improvements in 2020 and intend to spend an average of $11,851, according to a LightStream survey.
These home-improvement dollars have flowed to Home Depot’s bottom-line. Case in point, the company’s blowout earnings from last week.
For more details, we turn to Louis Navellier, whose Growth Investor numbers-based system found Home Depot back in December of 2017. Subscribers who acted on the recommendation are sitting on 50% gains.
Home Depot, one of my Growth Investor companies, also knocked it out of the park.
Comparable sales increased 23.4%, while comparable sales in the U.S. rose 25%. Total second-quarter sales jumped 23.4% year-over-year to $38.1 billion, exceeding analysts’ forecasts for $34.53 billion.
The Home Depot also reported that second-quarter earnings soared 26.8% year-over-year to $4.3 billion, or $4.02 per share, up from $3.5 billion, or $3.17 per share, in the second quarter of 2019. The analyst community was expecting earnings of $3.72 per share, so HD posted an 8.1% earnings surprise.
And, as the cherry on top, HD announced that it will pay a second-quarter dividend of $1.50 per share on September 17. This dividend represents the 134-straight quarterly dividend that the company has paid.
Below, you can see Home Depot’s strength here in 2020.
As I write Monday morning, the stock is up 32% — which includes its monster drawdown from the Covid-bear.
***How did Louis find Home Depot two-and-a-half years ago … as well as his other winners?
In short, numbers.
I’m a numbers guy. Always have been. Since I was a kid, I’ve loved math and I knew that math was the right way to understand the world.
Said another way, I depend on evidence for my decisions.
I depend on an objective set of criteria that signals what I should buy, when I should buy it, and when I should sell and collect the profits.
Louis is one of the early pioneers of using predictive algorithms to scour the markets for quantitatively-strong stocks. Forbes actually named him the “King of Quants.”
Over the decades, Louis has developed a high-tech trading system guided by preset algorithms — basically, step-by-step computer instructions.
It’s a program designed to digest vast quantities of market data, from which it identifies attractive investments, like Home Depot.
Now, while Louis’ subscribers are the beneficiaries of this numbers-based approach, to help non-subscribers, Louis created a free tool which is based on the same principles.
Called the Portfolio Grader, it’s a diagnostic that gives investors an instant snapshot of a stock’s financial strength.
It analyzes eight key fundamental factors:
- sales growth
- operating margin growth
- earnings growth
- earnings momentum
- earnings surprises
- analyst earnings revisions
- cash flow
- return on equity
Here’s how Home Depot looks when run through the Portfolio Grader:
Given the lofty valuations of today’s market, evaluating a stock’s financial strength is incredibly important. Feel free to use the Portfolio Grader with an investment you’re considering.
As we wrap up, the housing boom continues. And from the looks of the shortages on the market, there’s still room to run.
Long ITB and Home Depot.
Have a good evening,
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.