By David Russell
My reasons for saying this are both technical and fundamental. Technically, the entire ecosystem of companies is starting to outperform. Homebuilders, names such as Lennar (LEN) and D.R. Horton (DRI), are up 30 percent in the last three months, according to researchLAB.
The two big home-improvement retailers, Lowe's (LOW) and Home Depot (HD), have climbed 29 percent. And companies that supply the industry, such as Masco (MAS) and USG (USG), have gained 24 percent. By comparison, the S&P 500 is up 6 percent in the same period.
Other companies with a more tangential connection are also giving some interesting signals. One is the mortgage insurers--firms such as MGIC Investments (MTG) and Assured Guaranty (AGO). Also remember that hedge-fund manager Kyle Bass, who successfully bet against housing in 2007 and 2008, recently started buying MTG.
Bulk-material companies have also been turning around. Mexico's Cemex (CX) has more than doubled from its October lows, and Martin Marietta (MLM) is attempting to merge with rival Vulcan Materials (VMC). This industry is less directly tied to housing because of its links to commercial construction and highway building, but its recent improvement should not be ignored.
Then we have the fundamentals, which have been getting better for months now. It seems that almost every report on the industry has been positive: latest housing starts, new home sales in November, and homebuilder sentiment in October. The last existing home sales weren't as good as hoped, but they still rose. Most of the builders also showed improved orders the last time they issued quarterly results.
Another key point is the housing sector has been in contraction much longer than most people realize. Homebuilders didn't peak in 2008, but in mid-2005. The final two to three years of froth occurred mostly in mortgages amid a slowdown in actual construction. But now finally in the third quarter we are starting to see a gradual improvement. (See the Fed's Flow of Funds report, Table F.6, line 15.)
The gains have occurred at the same time that mortgage debt shrinks and employment grudgingly improves, which tells me that there is real demand from real people with real jobs. It's the polar opposite of the situation five years ago.
Finally, there are two other sub-industries that have recently popped up on researchLAB that are worth noting:
1. Railroad suppliers, such as American Railroad Industries and Greenbrier (GBX) that make rail cars, showed amazing profit and revenue gains last earnings season. There is a secular boom underway in railroads as containerization lets them ship more kinds of products than before. Add a rebound in the housing market to the mix, and it's one more reason to like the rails. Given the stage of the cycle we're in, these suppliers will probably outperform the big railroad operators like CSX (CSX) and Union Pacific (UNP) for the next few quarters.
2. Workmen's comp is an interesting little industry. Two small companies, Employers Holdings (EIG) and Amerisafe (AMSF), have both been ripping higher in the last few months. Earnings have been good, and they should benefit as more hiring improves. Bigger property insurance names, such as Chubb (CB), Ace (ACE) and Marsh & McLennan (MMC), have also been strong. Insurance stocks don't get a lot of mention because most analysts don't understand them, and I admit I am in that boat. But the charts and recent performance seem to be telling us something.