Credit: Shutterstock photoA top-down approach to investing involves looking at the big picture first, spotting trends and then narrowing down to an investment that will benefit from that trend. Some investment ideas are prompted by numbers; you see data released regarding the economy in general or a particular sector that suggests a certain strategy. Some come from simple observation of the world around you; you notice a change and seek out numbers that confirm it is broad-based, not just relevant to your locality. Just occasionally both things suggest the same play.
I live in a part of the U.S. which is a popular destination for retirees or those that work remotely and can choose their location. For that reason building, or more accurately the construction of high-end single family homes, is an important part of the local economy. Several friends in that industry have mentioned that they are busier now than at any time since the boom of the early 2000s. That is interesting, but unless confirmed on a national level, not particularly useful.
In this case, confirmation comes from the latest Dodge Data and Analytics Outlook Report. They predict a 15 percent overall increase in construction spending this year, with single family homes and office buildings leading the way, which indicates that renewed strength in the sector is not just a local phenomenon.
The obvious way to play that trend would be the homebuilders, maybe through the SPDR Homebuilders ETF (XHB). That is probably a decent strategy, but there are two potential problems. Firstly, building more homes doesn’t always equate to selling more homes, and secondly that investment takes no account of the increase in spending on office space. A better strategy would be to find a company that supplies high end products with utility in both spaces.
There are several possibilities there but the best of them may be Caesarstone (CSTE). They are a company that manufactures and supplies finished quartz for countertops and the like, making high end custom homes and luxury office suites their natural market. They are the market leaders in that growing business which makes the stock intriguing on its own, but there is one other factor that suggests that Caesarstone may be ahead of the game and poised for rapid growth, or rather sustained growth.
We have heard a lot in the last few years about weakness in investment spending by corporate America. It is only natural that corporate leaders are reluctant to invest heavily following a credit crisis and crushing recession, especially given a recovery that can, at best, be described as below par. In that environment a company that commits to building a whole new facility to meet expected demand is showing an uncommon bravery...or maybe has seen something that we have missed. Either way that is what Caesarstone did. Their new plant started producing in March and is beginning to ramp up production.
Given all of the positives and the shape of the above 1 year chart it would be normal to expect that CSTE was somewhat overpriced, but that is not the case. The stock trades at a forward P/E of just above 20, which is pretty average in this market. When forecast growth of 19 percent is taken into account, however, CSTE actually starts to look like good value. Even though this looks like a long term trade with great potential, my trading background won't allow me to take any trade without limiting potential losses. Even your best ideas can backfire at times. For that reason a stop around the recent $55 lows would be advisable.
There is something satisfying about a trade that suggests itself this way. It has been immortalized in commercials forever. You see something around you, maybe on the street, and then find a way to profit from it. The step that is usually left out, however, is the research that goes into confirming what you see and finding the best way to play it. When all of that is done and the result is a company with a great product and whose management has demonstrated vision and excellent timing, the opportunity looks too good to miss.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
