Beazer's Big Jump Builds Case for My Contrarian View on Sagging Housing Stocks

Maxim 20: If you're not willing to shell your own position, you're not willing to win -The Seventy Maxims of Maximally Effective Mercenaries ― Howard Tayler On Monday I discussed the current state of the market. It has not been a fun fourth quarter for investors, with more than 70% of the S&P 500 now in correction or bear market territory. Damage is even worse in high-beta sectors such as biotech or parts of the market that are sensitive to interest rates, such as homebuilders. My view is both of these sectors are oversold. That is not unusual as I always have been somewhat of a contrarian investor. I also am fully aware I am almost always early calling a turn. Therefore, while I am building allocations in both of these beaten-down parts of the market, I am doing so very incrementally. In addition, most of my dry powder is allocated via buy-write option strategies to further mitigate risk. I'll look at the housing sector in this piece and on Friday I'll look at some small biotech stocks that have been substantially oversold during the fourth-quarter massacre in the sector. My thesis on the homebuilders is that they have become oversold. Yes, housing activity has shrunk for three straight quarters and was down some 4% in the third quarter. A lot of this is due to rising mortgage rates, which appear to be stabilizing of late. I continue to believe that once investors get used to the new normal around mortgage rates they should come back into the market. Job and wage growth are strong and consumer confidence is high. In addition, annual housing starts continue to run approximately a third under their long-term trend, which they have done for a decade. With the population still rising, something eventually has to give. This should underpin the housing market for the foreseeable future. In addition, the homebuilders have been beaten up so badly in 2018 that bad news seems more than fully priced into the shares of their stocks, as reflected in the decline in the SPDR S&P Homebuilders ETF . SPDR S&P Homebuilders ETF (XHB) View Chart » View in New Window » Beazer Homes USA Inc. exemplifies what I'm talking about. When Beazer made a small acquisition earlier this year, management projected $2.50 a share in earnings in fiscal 2019. Yet the stock began the week at less than $9 a share. Even if you knock 50 cents to a buck a share off management's earnings projections from early in the year (and they have come down), the shares have been dirt cheap. Beazer is just one of many homebuilding stocks I have been accumulating over the past several months. On Tuesday Beazer reported third-quarter results that crushed pessimistic bottom-line expectations on an increase in sales of more than 14% year over year. The company also confirmed earnings guidance north of $2.00 a share in fiscal 2019 and authorized a $50 million stock buyback program while it vowed to reduce debt by a similar amount. Beazer is not hitting on all cylinders as order backlogs fell a touch in the quarter and the company expects first-quarter sales to be flat. However, considering how pessimistic investors have become on the housing sector, these results were good enough to trigger a 30% rise in the stock during trading on Tuesday. Beazer was the first of my recent homebuilding bets to pay off in a big way. I think it will not be the last.

Beazer's Big Jump Builds Case for My Contrarian View on Sagging Housing Stocks

The homebuilder shot up 30% on Tuesday after crushing earnings expectations and likely won't be the only bet to pay off in the sector.

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