On Monday we talked about some contrarian plays in energy after oil posted its seventh straight weekly decline last week - that commodity's longest losing streak in the past three years. Today we'll discuss some contrarian plays in housing as homebuilders have had a rough 2018 so far.
First, an observation about the markets and why I like contrarian plays in equities right now. I have been investing some 35 years. I can honestly say I have never seen such a divergence from media headlines to what is actually playing out in the economy. Given how negative the news media has been since the election you would think the economy is on the cusp of a recession. Yet, here we are with the market near all-time highs, GDP charging forward at better than 3% and earnings growing near 25% in the first half of 2018. When has that occurred this late in a bull market cycle?
Yesterday, we got good confirmation that things are pretty good for home builders and related 'nesting' stocks. Toll Brothers (TOL) ignited a big rally in home building stocks after it crushed both top and bottom line expectations. The large homebuilder rose over 13% in trading Tuesday and triggered a better than 2.5% rally across the home building index.
After the bell, La-Z-Boy (LZB) had a nice beat across the board and big rally in after hours and should trade substantially higher today. Big beats by both Walmart (WMT) and Target (TGT) also points to robust consumer confidence and spending levels. Lowe's (LOW) also reported solid second quarter results this morning.
These data points tell me investors are too pessimistic on this part of the market. Job growth is strong, the domestic is robust, business/consumer confidence is high and consumer spending is more than solid.
We have talked about Beazer Homes (BZH) recently, but this is a name I think investors should own here. The company announced yesterday that it plans to retire $96 million of 5.75% of senior notes with cash on hand. This is part of the company's plan to reduce debt by $250 million and leaves it with no debt obligations due until 2022. The stock has a challenging year but is more than cheap. Beazer also made a recent accretive acquisition and should print approximately $2.50 in earnings per share in FY2019. The stock trades a bit over $13.00 a share currently.
As always, I think LGI Homes (LGIH) sports good value even though the stock has had a rough year in the market. The company has done a great job of diversifying from its home market of Texas and now gets over 50% of its revenue outside the Lone Star State. Not that being based in Texas is a bad thing. The state's economy did grow 5.2% in 2017, the best of any state in the union. After posting just under $4.75 a share in earnings in FY2017, LGI Homes should deliver approximately $6.50 a share in profits this fiscal year and probably will do north of $7.50 a share in FY2019. The equity goes for less than $60.00 a share despite this rapid growth.
And that is our contrarian view on the market.
(Bret Jensen's article originally appeared on Real Money Pro at 10:46 a.m. ET on Aug. 22. Click here to learn about this dynamic market information service for active traders and to receive Doug Kass's Daily Diary and columns from Paul Price and others.)