My recent series of columns on the potential for an increase in first-time home buyer activity is still causing some angst among investors, because the 10-year Treasury yield has increased from its recent record low of around 1.33% to about 1.59%, and that has pushed mortgage rates back up by a similar amount.
The commonality among everyone's concerns is whether the yields will continue rising -- or reverse and decline to new record lows, as I believe is probable.
I am still of the opinion that yields will reverse their recent rebound and move to new record lows before the year is out. I've discussed the reason why I believe that to be the case in numerous columns, so I won't address it again, here. Deutsche Bank analysts have recently provided similar logic, according to Business Insider.
I first started suggesting that those home builders with a focus on first-time buyers should be considered as potential buys about a month ago -- in the column, What a Trump Win Would Mean for Infrastructure, Homebuilders.
Since then, Hovnanian Enterprises (HOV) and Beazer Homes USA (BZH) have risen by 12% and 20%, respectively, and have gone up steadily even as Treasury yields and mortgage rates increased recently.
I think this trend will continue. Here is what it will mean, and how investors can take advantage of this trend:
An increase in home purchase activity, especially by first-time buyers, is traditionally followed by an increase in the purchase of home furnishings and household appliances.
On the home furnishings front, I think the safest way to speculate on an increase in consumer spending in that space is by investing in Leggett & Platt (LEG) , and Culp (CFI) .
Leggett and Culp produce the components for the furniture manufacturers, which provide the finished product to the retailers, which then sell to the end consumer. As such, Leggett and Culp provide the widest coverage geographically, demographically and financially as a speculation on an increase in consumer spending on home furnishings.
The next level is the manufacturers, and in this space, I would consider Hooker Furniture (HOFT) . Hooker sells under its own name but also provides furniture to other retailers under private label names nationally, which again provides some diversification.
As to end retailers, the safest ones are La-Z-Boy (LZB) , Ethan Allen Interiors (ETH) , and Bassett Furniture Industries (BSET) .
Having said all of that, I am not advising taking positions in any of these companies yet. Relative to the valuations of the home builders, all of these companies are already too pricey for my conservative investment approach.
The current average price-to-earnings ratio is 20, which is twice the average expected P/E ratio for Hovnanian and Beazer Homes.
One of the reasons for this is that they all pay a dividend and appear to have been the recipients of capital flows in search of bond alternatives over the past couple of years.
The same is true of the two companies with a principal focus on appliance manufacturing that are publicly traded, Whirlpool (WHR) , and AB Electrolux (ELUXY) .
The differences for Whirlpool and Electrolux, however, is that with the exception of Middleby Corp (MIDD) , which pays no dividend and is already trading at a P/E of 31, they are the only direct options for speculating on an increase in appliance sales concurrent with an increase in first-time home buying and the building of homes for them.
As was the case with the furniture-component suppliers, the appliance-component sector is also pricey.
Illinois Tool Works (ITW) supplies parts and components to many of the private-label appliance manufacturers, and can provide similar diversification characteristics to that provided by Leggett and Culp for furniture manufacturers.
I'm still of the opinion that the best way to speculate on an increase in first-time home buying is through Hovnanian and Beazer, but these stocks should all be watched for corrections that may provide entry points.
As I have said, it's still possible that the Fed ignores the signals being sent it by the bond market with respect to economic expectations -- which are negative -- and raises the Fed funds target rate, which their economic model is suggesting is appropriate.
If that occurs, equity market participants will almost surely sell all of these issues on expectations of reduced home-buying activity.
