New homes sales are expected to eclipse 1 million in 2013, that’s a 25% increase from 2012 for you home-gamers out there. You can play games with restaurant and retails stocks, trying to time the superfluities of the often fickle American housewife. But if you’re a man, the only way to play the US economy is through housing.
It was the root cause of all of the pain and suffering and will be the savior. The Fed is intent on inflating home prices. Nationally, home values surged by 5% in 2012. I am expecting more of the same, AND MORE, in 2013.
I’ve talked about this thesis trade for years–but it’s coming down the home stretch now. The profits are about to get serious, moving out from “dead cat bounce” to boom.
Prices for materials are soaring and the price increases will go straight to the bottom line, pushing growth rates way up, making an argument for “multiple expansion.”
I bought FBHS today, a major play on kitchen cabinets and Moen brand plumbing materials. Another kitchen cabinet play is MAS.
If you’re into wallboard, look no further than USG. Price increases were implemented on 1/1/12. If they stick, the stock is going “full wallboard” to the upside. It’s worth noting, Pershing Square is the largest shareholder of FBHS and Berkshire Hathaway own 15% of USG.
The pure plays are the builders. I prefer BZH, PHM, SPF and HOV.
Other material plays that will go higher in a housing boom are FAST, VMC, EXP, CX, TXI, LPX, GVA, JHX, PATK, MTX.
Roofing: BECN, OC
Paint: VAL, SHW, CE, FUL
Furnishing: ETH, PIR, BBBY, WSM, RH, NWL
HVAC: GNRC, LXU, FIX, IR, LDL, SPW, SJI, NTK, RBC
Doors: GFF
Carpets: MHK
Mortgage software: ELLI
Contractor Review Site: ANGI
Landscaping: POOL
Faux Wood Decks: TREX
Real Estate Sites: Z,TRLA
Appliances: WHR, SWK
Electric: AYI, HUB-b
Windows: NX, PGTI
LED Lighting: CREE
Flooring: AWI, TILE, LL
NOTE: I took profits in SNE.
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They are coming for your 3-D bullet printers DDD, SSYS
Congressional Democrat to propose bill banning ‘3-D printing’ of high-capacity ammo clips.
http://thehill.com/blogs/floor-action/house/277997-dem-to-propose-bill-banning-3-d-printing-of-high-capacity-ammo-clips#ixzz2ILSRPy7P
Oh, and how does that work?
Hah! Comforting to see the imbeciles in the population are well represented in Congress.
SNE went full retard this morning.
Who does windows? I see a hell of a lot of folks replacing their glass. Remodels and restores are going balls to the walls in my neighborhood, four on my block as I speak.
NX, PGTI and FBHS
Any Japanees suppliers – ie: Toto toilets?
PGTI one year return 317%…unreal
BAC and WFC are also “housing related” plays given their huge portfolio of home loans – if your thesis is right, those banks will also trade much higher – Buffett also a big shareholder
$WY might be good for a push too, if consumption of construction materials is about to heat up. It’s been in a strong uptrend, but if we’re really about go into a infrastructure build, it’ll have another 20 pts of upside, at least.
WY should go up regardless. I like them because they are a late cycle play on housing. Lumber prices are up over 40% Y/Y which really boosts profitability in their wood products segment but we should start to see some price pressure in the back half of the year with new capacity coming online. The real money maker for WY will be when lumber price strength flows back to timber (log prices are mostly flat over the last few months). The lag is usually 12-18 months when lumber manufacturers can afford to pay out more. This will also boost prices for the 6mm acres of timberland WY has.
WY also has a top 20 home building business that is probably the best positioned among their public peers. Public HBs can’t find enough lots and are starting to overpay subsequently increasing their incremental working cap investment. WY has a long land position as I mentioned and since they are partially integrated I estimate their incremental working cap requirement is only ~5% of incremental revenues (vs. 20%+ for public peers). The latter point should allow WY to gain share which is especially beneficial given their operations in high price, high margin markets.
Finally, their pulp business should see only modest pricing pressure this year from South American capacity additions given recent mill closures and conversions. The street isn’t giving WY any credit for what I’ve mentioned and I think they are either generically “trend line” forecasting or just neglecting the company because it is rather hard to value with its REIT structure – the timberland biz is the only actual REIT while the other segments are taxable subsidiaries. This makes an FFO multiple (what most REITs are valued on) inadequate since most of their earnings aren’t truly REIT like. However, you can’t really use an EV/EBITDA because the real estate segment has almost no D&A and this neglects the tax benefits of the timberland business (same holds true for other multiples). You also can’t look at previous cycles because it wasn’t a REIT then and it should trade at higher multiples now.
Sell side analysts are fixated on their price targets and the only appropriate way is a sum of the parts effectively valuing each biz independently but this method gets torn apart by the buyside because it opens the analysts up to all sorts of pushback on assumptions.
Moving on and my final point: 1) consensus estimates need to come up as should ratings which will likely be a catalyst in the near term as sell side analysts pay catch up; 2) WY is worth at least $46 if we can get 1mm+ starts this year. I would be tempted to look for a pullback after earnings (next Friday) but I think they are going to crush earnings on stronger wood products performance so they might be worth an earnings gamble. Street estimates are pricing in normal seasonal decline in 4Q but they were actual up over 5% Q/Q.
I meant normal seasonal decline in lumber prices – forgot to include that.
A-game.
Nice overhead analysis. Good work.
Thanks, Cain. I think it is one of the most compelling stories in the housing space and certainly the most misunderstood. I still can’t believe the street is neutral/sell rated on the name. Perfect example of analysts neglecting basic economics and fundamental analysis. It probably also doesn’t help that it’s usually covered by paper analysts who don’t understand the housing space and the principles of a REIT.
If you have access to a Bloomberg terminal, look at the research out. There’s just one or two bullish analysts and I think only one really knows what he is talking about.
Fly- since you like to squeeze shorts, take a look at $DWA Dreamworks Animation getting ready to squeeze short nuts.
20% of the float is short. The Demark pros can correct, but it looks like a td countdown/combo 13 is ready to go as well
I’m looking at AWI. If vacant strip malls start getting fitted out they need flooring and T-bar.
Housing affordability index – higher the number the better.
http://research.stlouisfed.org/fred2/series/COMPHAI?cid=97
Housing starts – going vertical but has a long way to go
http://research.stlouisfed.org/fred2/series/HOUST?cid=32302
home starts were up ((BIG)) here in Swanky Richville , this past week, for the first time in years..
sweetness!
(*planning my escape)
“Full wallboard!”
Hahaha! Another classic!
If Pershing Square holds a large position in a company, that company might face some selling pressure if Ackman gets his Herbalife shorts squeezed and he needs to raise cash.
No argument with price, or making money trading stock. The front end of this brings me to pause. The house buyers are all traders anticipating a capital gain in something that takes 30 to 60 days to sell? Or has a wonderful confidence and optimism taken hold across America? Or both.
Again, no argument with the stock trading part. But “the folks” sure are strange, considering nothing in the underlying fundamentals of the economic quagmire have changed
Middle and upper lower class drinking Kool Aide do not see that unless they become wealthy, they are doomed. The mortgage payment for the new house that seems so affordable now, will not be when the grocery bill doubles, and then doubles again.
Trade well, iBC friends.
regards
Great post.
Sold my Honda, big recall. Buy back cheaper next week.
(laughter)
If this passes next week the stock market rally can continue for at least another 3 months!
http://www.usatoday.com/story/news/politics/2013/01/18/house-republicans-debt-ceiling-budget/1845439/
Regarding 3d printers.
Once they proliferate, in what circumstance does it not become just a new medium in the usual napster/torrent pirating story?
No circumstance
You’ve forgotten GGC … Highly leveraged to housing (PVC Pipe) and natty. Cheap gas means higher margins ….
VHC the only overshorted pig not getting the squeeze?
VHC is in need of a new fund manager friend with a spare $200 million on hand to decimate the shorts.
MI Homes…P/E 108; PEG 7; stk perf 1yr 171.62%
http://finviz.com/quote.ashx?t=mho