January 14th, 2015

Homebuilders Building Foundation For Next Move

ImageSomething I learned long ago is that “industry group controls 30% of a stock’s price movement.”  So a logical place to begin the search for stocks with better than average relative strength but lower than average risk is by narrowing the available universe down to a select few Industry Groups.

One academic research study concluded that “a mutual fund manager’s success in identifying and emphasizing specific industry sectors in their portfolio was a far better forecaster of the fund’s performance than ability to pick individual stocks.”  Although the statistics were compelling on their own, they were even more impressive because the study found that managers with good industry-selection abilities were likely to continue to outperform their peers over many successive periods.

Through our Stocks on the Move scan, we’ve recently noticed that in addition to significant money flowing into REITs pushing their prices higher as discussed previously, the Scan also filtered out a significant percentage of stocks from a related industry group: homebuilders.  The Scan from a few days ago produced the following results:

Stocks on the Move Scan

A quarter of the stocks generated by that scan were REITs, or 13.3% of all REITs (REITs represent 6.3% of all listed stocks).  Homebuilders, on the other hand, represented only 4% of the stocks generated by the scan but those 7 stocks were a quarter of all the homebuilders (homebuilders represent only 0.4% of listed stocks).  Although homebuilders represented a small percentage of the stocks generated by the Scan, more homebuilders met the scan criteria.

One thing you should know about the Homebuilders Industry Group is that among all the groups, homebuilders tend to generate similar chart patterns and consistently move together.  In Chapter 15 of Run with the Herd entitled “Segmenting the Market”, I presented the following data on homebuilders in the periods leading up to and during the Financial Crisis Crash of 2007-09:

Homebuilders

The percentage price moves of all the homebuilders weren’t identical but they were in the same direction and on orders of magnitude similar relative to the average S&P 500 stock.  Over the six years to year-end 2005, the S&P 500 declined 15.0% while homebuilders appreciated anywhere from 404% to 1275%.  From the end of 2005 to the trough of the Financial Crisis, the average S&P 500 stock declined -49.3% while homebuilders lost anywhere from -62.3% of their value to over -90%.

It looks as if we’re facing a similar situation today.  After their huge 100+% recovery off the Financial Crash bottom, most homebuilders have been constructing a consolidation pattern throughout 2013-15.  But now members of the group are showing signs of being ready to exit across to the top of their respective consolidation patterns.  Using a typical “rule-of-thumb”, the percentage move following a consolidation should be approximately the same as the percentage move preceding it.  Using XHB, the ETF for the group, as a proxy that represents a move to approximately 65-70 (click on image to enlarge):

Homebuilders - 20150111

Five homebuilders whose similar charts clearly depict these consolidation patterns are (click on symbols for charts):

However, a word of caution.  If the market turns ugly and does enter what turns out to be a 25-30% correction then these patterns could turn from being consolidations into reversal tops and momentum reversing causing breakouts through the bottom boundaries.  These charts don’t predict … they only indicate that supply and demand has remained fairly balanced for nearly two years and, once it begins, momentum will generate an extended move in either direction.

Fundamentals like low interest rates, increased residential rental rates, increased consumer liquidity and savings from lower gas prices and improved job picture suggest that the breakout, when it does take hold, will be on the upside.

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January 8th, 2015

Money Flowing to REITs

imageThe market closed on Tuesday 2002.61, down for the fifth trading day in a row, a total of  the total of 4.2% since peaking at 2090.57 on 12/29.  One of the notable highlights of the day, however, was the stellar performance of REITs.

There is a universe of approximately 4000-5000 stocks from which investors to choose but the selection process is daunting since your goal is select a stock from among the 50% that will appreciate and outperform your benchmark index over your investment time horizon.  The best process for winnowing down the list to a more manageable number is by scanning the universe of all stocks against a number of criteria.

Readers and Members know that my favorite scan is called “Stocks on the Move” (I first wrote about this in “Stock Picking Now Feels Like Shooting Fish in a Barrel” just after the Financial Crisis bottom on July 23, 2009) and combines the following technical and fundamental criteria:

  • Price per share > $15
  • Relative Strength Indicator today > top 50%
  • MoneyStream Surge for past week > top 50%
  • EPS percentage change from 4 qtrs back > top 50%
  • Volume surge over past 5 days > top 50%
  • Daily Percentage Price Change > top 50%

[MoneyStream is a Worden Bros. indicator that grew out of joint venture with a large regional brokerage firm to develop a price/volume indicator similar to on-balance volume (OBV) and is interpreted in the same way you by looking for divergences between price and volume trends.]

Yesterday’s “Stocks on the Move” scan filtered out only 108 stocks as compared to the average 250-300 stocks that appeared on the similar lists throughout December.  Notably, about half the stocks on yesterday’s list were REITs, primarily because among all stocks, they were the biggest price movers for the day, had the largest surge in volume and were the best performers relative to the S&P 500 for the day.

Adding to what makes these securities so interesting is the similarity of their charts. Many of these REITs have clearly trending higher appear to have recently crossed out of consolidation patterns, above upper boundary resistance trendlines.  Some of the 40 REITs making the cut yesterday included (click on symbol to see chart):

  • Retail
    • SKT (Tanger Factory Outlet)
    • SPG (Simon Property Group)
    • EQY (Equity One)
  • Residential
    • AEC (Associated Estates)
    • SNH (Seniorhousing Properties)
  • Office
    • OFC (Corporate Office Properties)
    • COR (Coresite Realty)
  • Healthcare
    • SBRA (Sabra Healthcare)
    • OHI (Omega Health)
  • Diversified
    • BDN (Brandywine Realty)
    • RPAI (Retail Properties of America)
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January 6th, 2015

Forget Oil, Go Lithium

GigafactoryOil prices has tumbled more than 50% since the beginning of last summer so many investment advisers are recommending today that investments be made in the energy sector, arguing that the stocks have fallen so that many represent the best bargains in many years.

If you had been able to predict the oil price rout in July and sold short, you would have discovered that not all energy-related stocks and ETFs acted uniformly. Some actually went up (EEP up 12.49%, VLO up 1.68%) while others dropped anywhere from -5% to
-70%. For example, CVX decline -16.81%, COP declined -19.33, OIL -49.48, RIG -56.39 and CRK -73.99.

If you believe that oil prices can’t go much lower and will soon rebound then it would seem logical that buying an oil-related stock is a “sure thing”. But how does one select among the more than 300 energy stocks of all sizes, dividends, volatility, growth.

Oil Prices

Should you select those that performed the “best” over the past 4-5 months under the assumption that they will perform best in the future. Or, conversely, should you buy those that performed the worst because they could possibly bounce back the most. If you’re looking to put money to work, though a better strategy than catching one of 300 “falling knives” might be to look someplace totally different, someplace that will be “driving the future” rather than the energy that has “driven the past” (no pun intended).

Rather than betting on a recovery in oil prices, why not take out a stake instead in the industry making possible electric transportation – lithium, one of the most valuable natural resources of the new electronic world thanks to its unique and extremely valuable characteristics:

Lithium

As described in a recent Mauldin Economics report:

  • Lithium has such a low density that it floats on water and can be cut with a butter knife. When mixed with aluminum and magnesium, it forms lightweight alloys that produce some the highest strength-to-weight ratios of all metals.
  • Lithium tolerates heat better than any other solid element, melting at 357°F.
  • Lithium batteries offer the best weight-to-energy ratio, making lithium batteries ideal for any application where weight is an issue, such as portable electronics.
  • That same high energy density and low weight characteristic makes lithium batteries the best choice for electric/hybrid vehicles due to car gas mileage. A car’s biggest enemy is weight.
  • Lithium has a very high electrochemical potential, meaning that it has excellent energy storage capacity.

The lithium market is dominated by only three publicly-owned producers:

  1. Chemical & Mining Company of Chile (SQM);
  2. FMC Corp. (FMC);
  3. Rockwood Holdings (ROC)

Lithium Industry

In addition to its excellent dividend yield and relatively low (as compared to the pure-play ROC) price-earnings ratio, the SQM chart is most volatile and shows promise to bounce off the bottom of the horizontal channel it’s formed since late 2013 and attempt to cross above the upper boundary at 33, a 40% move.

SQM - 20150105

Tesla has just completed a gigafactory that exceeds all comparisons in the belief that the lithium-ion battery will be the power source for many more battery powered cars, drones, toys and power grid storage.  I’m hoping that SQM will benefit from that future.

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