One of the few trends that came out of second-quarter earnings were the solid results from the housing complex in the U.S. In a few instances, there were some upward revisions to guidance, but results were largely in line with realistic-to-slightly optimistic expectations. These stocks have mostly performed quite well, year to date, and I remain bullish, long term on household formation and repair and remodeling trends.
These two macro themes have strong underlying demographic drivers, as well as favorable rates, even if they do actually go up one day. It's just a matter of timing and having realistic expectations. Still, I'm materially less excited about this subsector than I was in May.
For now, I think the trade may take a breather. Here's why (no reason to over-complicate it):
Inventories for housing supplies generally lead housing start expectations, so there can be a quarter or two lag as inventories in the supply chain get absorbed into the next busy building season. And nothing goes up in a straight line, although producers of anything, during periods of health, generally produce in a straight line.
Producers of insulation, like Owens Corning (OC) , doors, like Masonite International (DOOR) , flooring, like Mohawk Industries (MHK) or hydrants, like Mueller Water Products (MWA) can push production in anticipation of continued sequential strength in housing and repair/remodel trends -- but hiccups can emerge, especially during a "mid-cycle" period, which may be starting.
As valuations have expanded across the group, earnings really need to come in strong into the second half. I am not sure the underlying housing environment has the opportunity to accelerate in the near term. This would be needed to support further multiple expansion or earnings growth in the supplier stocks.
I'm optimistic, just not that optimistic. Looking at inventories and revenue growth at distribution points, the group is probably due for a bit of a growth breather. Nothing big, just not enough to support the current expectations.
Watch for a better entry point as we enter the back half.
