It is really hard to have much conviction in this market at the moment, as I discussed in my last column. One of three things need to happen before I get more constructive on the overall markets at current trading levels.
They are a 'pivot' from the Federal Reserve, any prospects for a peace settlement in Ukraine and/or solid signs of an improving economy. I think all three items on this list are unlikely before the end of 2022. Therefore, I remain very cautious on equities as I have been throughout 2022. However, given the carnage in equities this year across so many sectors of the markets, sometimes some stocks become so cheap one has to take notice. Even if it may be several quarters before economic prospects turn around.
However, some homebuilders are priced like the housing market is frozen. This is not likely given than housing starts have remained under the historical average since the housing bust 15 years ago.
I'm highlighting several names I am starting to slowly accumulate positions in, primarily through covered card orders.
The housing sector has taken the brunt of the new Federal Reserve monetary direction in 2022. Mortgage demand has plummeted to 25-year lows as the average 30-year mortgage rate has rocketed from just over 3% to begin the year to nearly 7% now.
Homebuilders have taken it on the chin as cancellations are on the rise and housing affordability is in the dumpster. These headwinds are likely to persist for a few quarters as the housing market finds a new equilibrium.
But in the meantime, I've have added some shares to my position in Beazer Homes (BZH) recently. This builder has paid down the debt on its balance sheet during the good times of the past few years and sells at approximately one and a half times its likely profits this year.
M/I Homes (MHO) is a new position. This homebuilder crushed bottom line expectations with its second quarter earnings report and sells for less than two and a half times this year's profit projections.
Both companies have significant order backlogs to work off and have a small percentage of their stock held short.
Financials also have gotten cheap.
I like B. Riley Financial (RILY) here. Yes, investment banking fees have dried up after the IPO and SPAC craze of 2021. However, the company has a diversified revenue stream. A few insiders including the CEO bought approximately $9 million in new shares during the third quarter. The company also has an adequate balance sheet to continue pay out a 9% dividend yield while it awaits the financial markets to turn around.
I have also added to my One Main Financial (OMF) holding. Yes, the company's delinquency and charge off rates are going to go up in coming quarters as consumers remain under considerable duress thanks to the scourge of inflation. Earnings per share are likely to go from just over $7.00 this year to $5 or so in the next fiscal year. However, at four times this year's earnings and with a better than 12% dividend yield, the shares seem priced for a long and deep economic contraction.
And those are four names I am finding too cheap to ignore even as I believe the country is already in a recession or will soon be in 2023.
