Seeking Alpha
Long/short equity, growth, medium-term horizon, registered investment advisor
Profile| Send Message| ()  

Each week, the Association of American Railroads ("AAR") provides insight into economic activity by reporting on U.S. carload volumes.

The data is very useful for confirming trends, not only in the economy but in specific industries.

This year, it's been especially useful in helping investors keep their focus on homebuilders, which are one of the top performing baskets this year.

Back in February, I wrote how homebuilders were laying a foundation for growth. And, in April, I wrote how the basket was giving investors another chance to buy. With the homebuilders ETF (XHB) up 31% year-to-date and 9.3% since early April, investors are hunting for clues as to whether the trend will last through year end.

Year-to-Date

Since April 11th

XHB

31.33%

9.31%

SPX

11.64%

2.57%

So far, the railroad data suggests the outperformance will continue.

In the most recently reported week, U.S. lumber and wood product carloads were 29% higher than the comparable week a year ago. This brought year-to-date lumber carloads to 12% above last year. And in July such carloads came in 9% above July 2011 and 22% above July 2010.

As you can see from the following chart, few rail carload categories have boasted better growth than lumber this year.

The strength in lumber reinforces homebuilders' improving industry view.

In the most recent National Association of Home Builders/Wells Fargo confidence index report, homebuilders were the most optimistic in 5 years. And the index measuring buyer traffic was the highest since 2006.

We've also seen solid trends in permits and new home inventory, which will be updated again on August 16th.

In the most recently reported month of June, permits were 19.3% higher than last year. New home sales were 15% higher year-over-year. And, months supply fell to 4.9, down from 6.6 a year ago.

Given lumber trends remain strong, inventory remains tight and confidence remains high, investors should remain confident for upside through this year.

This suggests additional corrections and pullbacks are an opportunity to increase exposure to top plays such as Pulte Group (PHM), D R Horton (DHI), Lennar (LEN), Toll Brothers (TOL) and Ryland (RYL). It also suggests investors looking for more risk can consider names such as K B Homes (KBH).

Source: Homebuilder Upside Supported By Railcar Volumes