This Looks Constructive

 | Oct 20, 2012 | 2:30 PM EDT
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It's often constructive to track stocks and industries that buck market downdrafts -- and, on Friday, there actually were a few pockets of strength amid the carnage. For example, several leading housing-related stocks closed above their 10-week averages Friday, despite data from the National Association of Realtors showing that September home sales fell 1.7%.

Shares of Lumber Liquidators (LL), which I currently hold in a growth portfolio, bounced off its 10-week average. The stock is currently holding between that key price line and its Sept. 14 high of $54.

In a market uptrend, this stock would be in buy range. However, there's something else to watch for: The flooring manufacturer is set to report its third quarter before the open Wednesday. Wall Street is eyeing income of $0.34 per share on revenue $189.54 million, which would constitute increases over the year-earlier quarter.

This stock has rallied in 2012 amid optimism about an improving housing market. Lumber Liquidators' market capitalization is $1.3 billion. It moves 557,000 shares per day, on average, and the stock's beta is 1.36, indicative of its propensity to volatility.

It's not atypical for small-cap names to be more volatile than the broader market. Another housing-related small-cap with a high beta is Beacon Roofing (BECN), whose beta is 1.47. This stock tends to exhibit a more wide-and-loose trading character than does Lumber Liquidators. Beacon rallied to an all-time intraday high of $31.75 Thursday and retreated along with the indices Friday, closing 2.3% lower at $30.19. It finished the session 6.3% above its 50-day line, perched at a healthy level.

The fundamentals on Beacon can also be erratic. Revenue growth slowed to 4% in the most recent quarter, its first drop into the single digits since the March 2011 quarter.

The company is due to report its fourth quarter in late November. For the year, Beacon is expected to earn $1.67 per share for a year-over-year gain of 44%. That's seen slowing in 2013, to $1.31 per share.

I've written about Beacon here before, and I've liked its prospects for the past several months. But, heading into 2013, when earnings are expected to decline, I'm less sanguine. The choppy trading character also gives me pause.

Another housing-related name that I have held in the past is Nationstar Mortgage (NSM). The non-bank residential mortgage originator has a few things in common with Lumber Liquidators and Beacon Roofing: All three have had fairly recent initial public offerings. Nationstar is the youngest of these, having made its trading debut in March of this year.

Nationstar is also a small-cap. The stock has been pulling back from its Oct. 3 session high of $37.20, and closed Friday at $32.58, 8.3% above its 50-day average.

Nationstar, which has been growing through acquisition, made a bid of $2.45 billion for the mortgage unit of Residential Capital.

According to reports, Ocwen Financial (OCN) and Walter Investment Management (WAC) joined forces in a competing bid that's $40 million higher than that of Nationstar.

Nationstar is expected to report its third quarter in mid-November. Analysts expect per-share earnings of $0.63 a share on revenue of $369.92 million. Those would mark huge improvements from a year ago, and would reflect both organic and acquired growth. In the year-ago quarter, the company reported a loss of $0.03 per share on revenue of $90.9 million.

The current consolidation could offer a new buy opportunity if the stock can maintain its position above key moving averages.

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