The U.S. economy looks to be on a fairly solid course going into 2016. The Federal Reserve just increased interest rates for the first time since June 2006, and the first change in rates since December 2008, when the central bank lowered rates to nearly zero.
The Fed also predicts the economy will grow during the coming years, although somewhat slowly. It expects the economy to expand by 2.4% in 2016 and unemployment to reach a low of 4.7%. Inflation should remain tame, with the Fed struggling to hit its 2% inflation target rate in 2016.
While not booming, the housing market looks to be in reasonably good shape, despite the rate increase. Nationwide Mutual Insurance Company's Leading Index of Healthy Housing Markets for the fourth quarter of 2015 is at 108.2, with an index value over 100. That indicates the national housing market is healthy.
Mortgage rates are tied more to long-term interest rates than the Fed's rate. It does not seem likely that this rate increase will have much effect on the housing market, which suggests that companies whose businesses relate to the housing market should do well going into 2016.
One such company is D.R. Horton (DHI), the country's largest home builder, It should be a top performer both near and long term. It will benefit as the housing market strengthens and Millennials, the country's largest generation, move into their home-buying period. The company's stock is also well priced, as indicated by its price-to-earnings ratio. This is P/E/G relative to growth, and measures how much the investor is paying for growth at today's stock price.
This is the key variable for my Peter Lynch-based strategy, which is an automated strategy I created based on the writings of mutual fund wiz, Peter Lynch. A P/E/G of up to 1.0 is acceptable, and 0.5 or less is considered especially strong. Horton is not quite in this most desirable territory, but with a P/E/G of 0.53, it is close. With such a well-priced stock, solid target market and leading position among homebuilders, Horton is a stock worth your consideration.
Another company which is in position to ascend with the housing market is Lowe's (LOW), the home improvement retail dynamo, My James P. O'Shaughnessy strategy gives this company its highest rating. This is in part because of its large market cap ($70 billion), earnings per share that have risen in each of the past five years and a price-to-sales ratio of 1.19. Price-to- sales ratio is a tool for measuring which growth stocks are cheap enough to buy and Lowe's is nicely below the 1.5 maximum allowed.
In addition, among the companies who pass these three criteria, the strategy singles out the top 50 based on relative strength, which is how well a stock has performed in the past year vs. the market. Lowe's makes it into this top-50 group.
One more housing-related company is worth mentioning, banking giant Wells Fargo (WFC), the country's largest private mortgage lender. Like Horton, Wells is favored by my Lynch-based strategy. Though Wells' P/E/G is not quite as low as Horton's, it is still a desirable 0.72. Also in the bank's favor is an equity-to-assets ratio of 11%, more than double the 5% minimum needed.
