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Housing, Homebuilders and Contrarian Plays



On Monday, we talked about some of the conflicting games in the energy industry after last week's week saw its seventh weekly decline – the longest losing streak of this commodity in the last three years. Today we will be discussing some conflicting games in the housing sector, as builders have had a tough 2018 so far.

First, an observation about the markets and why I currently like Contrarian in stocks. I invested about 35 years. I can honestly say that I have never seen such a departure from the media headlines about what is actually going on in the economy. Given the negative news media since the election, one would think that the economy is on the brink of recession. But here we are with the market near all-time highs, GDP forward at better than 3% and profit close to 25% in the first half of 201

8. When did that occur so late in a bull market cycle?

Yesterday we received a good affirmation that things are pretty good for contractors and related nesting estates. Toll Brothers (TOL) triggered a major rally in house construction stocks after undermining both upper and lower bound expectations. The big developer rose over 13% on the trading day, triggering a recovery of more than 2.5% in the house-building index.

After the bell, La-Z-Boy (LZB) had a nice hit the board and the big rally in the late hours and should be traded much higher today. Walmart (WMT) and Target (TGT) big beats also indicate robust consumer confidence and spending levels. Lowe (LOW) also posted solid second-quarter results this morning.

These data indicate that investors in this part of the market are too pessimistic. Employment growth is strong, domestic is robust, business and consumer confidence is high and consumer spending is more than solid.

Recently we talked about Beazer Homes (BZH) but that's a name that investors should own here. The company announced yesterday that it plans to withdraw $ 96.7 million of 5.75 percent of senior notes in cash. This is part of the company's plan to reduce its debt by $ 250 million and has no debt due by 2022. The stock has a challenging year but is more than cheap. Beazer has recently made an acquisitive acquisition and should achieve earnings per share of approximately $ 2.50 in the 2019 financial year. The stock is currently trading just over $ 13.00 per share.

As always, I think LGI Homes (LGIH) has a good value, even though the stock had a tough year on the market. The company has positioned itself well from its home market of Texas and now generates more than 50% of its revenue outside the Lone Star State. Not that it's a bad thing in Texas. The country's economy grew by 5.2% in 2017, the best of all states in the Union. After LGI Homes posted a profit share of just under 4.75 US dollars in the FY2017, LGI Homes should achieve a profit share of about 6.50 US dollar in this financial year and is expected in the financial year 2015 north of 7.50 US dollars per Place share. Despite this rapid growth, the share capital is less than $ 60.00 per share.

And that is our contrary view on the market.

(Bret Jensen's article originally appeared at 10:46 ET on Real Money Pro August 22. Click here to learn more about this dynamic market information service for active traders and Doug Kass's Daily Diary and columns by Paul Price and others.)


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