In this column, I'm going to pound the table for stocks (once again), then comment on several homebuilding stocks, including two from my Top Ten list for 2013, DR Horton (NYSE:DHI) and Hovnanian (NYSE:HOV), as well as Mueller Water Products (NYSE:MWA), a soon-to-be beneficiary of the housing boom and a Top Ten pick.
By the way, my Top Ten list is up 20.3% so far and, for a second consecutive year, ten out of ten picks are posting solid gains. This year, the S&P 500 is finally giving us some formidable competition. It's up a weighted average 12.9%. If you'd like to review the stocks on the list and the record, go here.
A Bull Market? Really?
Yes, really. Funny thing is, the last part of my market commentary from a December 20 column still applies:
"The stock market is going higher, maybe a lot higher. There are many reasons, but this one surprises me as much as anything: I can't find any unapologetic bulls."
You'd think by now, after the S&P 500 streaked to a double-digit gain in the first quarter, we'd see the emergence of an unapologetic bull or two. Not hardly. All I see are namby-pamby, looking-over-their-shoulder types. There isn't one rip-snorting bull who can articulate the case. (Okay, maybe one.)
The bears, on the other hand: Wow. These guys have PASSION. Where to start, the list is long… Jeremy Grantham says the planet can only sustain 1.5 billion people, while Marc Faber, David Stockman, Bob Janjuak (Nomura), Jim Rogers and many others talk of crash and apocalypse. A lead columnist over at Marketwatch: 3 out of 4 of his recent columns mention "Crash" in the headline.
It ain't gonna happen, folks. As Ben Graham explained the futility of the Wall Street establishment: There are too many people thinking the same thing, trying to do the same thing.
Where are the raging bulls on the other side, to counterbalance the gloom and doomers? We need a John Templeton-type to stand up and say, follow me, this is going to be a grand ride. You know, Dow 30,000 sort of stuff. Until we get some unbridled optimists (I'm sorry, Wall Street analysts, but raising your S&P target 3% doesn't qualify), this is the path of least resistance for the S&P 500, the path certain to make those cantankerous bears even more cantankerous: Up, up and away!
And when will this wealth-building cycle end? History tells us that enthusiasm and complacency are the hallmarks to watch for. Given the depth and breadth of the bear market that ended in 2009 and the accompanying credit crisis, my guess is that it will take few years to rebuild confidence. In the meantime, there are stocks worth buying, and that includes many of the homebuilders.
Top Ten Picks: Hovnanian , DR Horton , Muller Water
One beautiful thing about investing in homebuilders is the operating model itself. Simple and clean and easy to analyze. Builders are not subject to foreign competition. You don't have worry about product obsolescence. It'll always be in demand. The companies won't get picked off by Internet competition. Local craftsman build a local product of lasting value. Pretty cool, right?
Here's the best thing for investors: Real estate moves in elongated cycles, and with very little oscillation. Prices dropped for six consecutive years going into 2012, and now they're headed up, probably for the next decade or more. As hot as the market is now, we still need about a 40% increase from current levels of building to meet demand.
Publicly-traded homebuilders, in particular, stand to benefit from the rebound in the housing cycle in an outsized way. Competition from private homebuilders is benign - they've either moved on to other jobs, or if they're still in business, they don't have access to capital like the public builders. Further, the inventory of older homes is, well, older, and (generally) in need of repair and upgrade.
Factor in rising prices, off-the-charts affordability (v. renting), and a supply/demand picture that will be a tailwind for several years, and this really is as-good-as-it-gets for the homebuilding group.
Now, as to valuation: If demand is static from current levels, we can argue valuation. Fair enough. But if we've got several years of robust and growing demand in front of us (as I expect), the stocks are quite cheap. I like the entire group, from my Top Ten picks, DR Horton and Hovnanian , to several other players such as Pulte (NYSE:PHM), Ryland (NYSE:RYL), KB Homes (NYSE:KBH) and Lennar (NYSE:LEN), among others.
Another way to invest in the housing rebound is Top Ten pick Mueller Water Products . The market leader in fire hydrants and water infrastructure, Mueller typically lags the housing cycle by a year or so. Because Mueller benefits in a big way from new lot development - which has been near zero for several years and is suddenly taking off - it's one of my favorite picks for the next couple of years.