Last winter through the spring it was very obvious that the long home improvement / short housing trade was on big time. Consumer spending led the way as people who refused to sell their houses at the bid which was most likely about 5-7% lower decided to fix up their existing houses instead and live in them. We saw names like Bed Bath & Beyond (BBBY) and Home Depot (HD) go nuts to the upside with momentum traders taking notice. This while homebuilding stocks floundered, save for one push during mid April as the short got fried.
That trade is over. For whatever reason, maybe the consumer is just flat broke, maybe they decided that it’s not worth it to fix up their homes, or maybe they have all done so now and there just isn’t any demand anymore. I don’t know, but the action in these stocks bore this out, and I think over the next few quarters we'll see some pretty awful numbers from all kinds of home improvement companies. Think beds, Tempur Pedic (TPX) and Select Comfort (SCSS) look horrible as that trend has ended. HD and BBBY look like they are perched on a cliff. Another former momentum darling, Dolby Laboratories (DLB), is completely broken. Other home improvement brands look bad as well; I don’t see a single one I’m interested in on the long side.
Take note of this because if the consumer really is broke again, they aren’t going to stop buying groceries and clothing, it’s the home improvements that will go first. I would look for the highest priced goods that will be cut first and get short.
This is a tough market with a lot of cross currents, but if you’re willing to stay small, be long/short, and take profits, there’s still room to make money.