Housing Starts

Good morning contrarians! Welcome to the Daily Contrarian, our morning look at events likely to move markets. It is Tuesday, March 18. Today’s Stocks On The Contrarian Radar©️ segment features homebuilder stocks, especially LEN 0.00%↑, and starts at the bottom of this page.

State of Play

Stocks advanced yesterday — the second day in a row — but finished off the highs. As we eye our board of indicators for signs of direction at 0700, things are quiet:

• Stock index futures are down a tiny bit. The Nasdaq is pointing to a drop of 0.3% at the open with the S&P 500 just behind it;

• Commodities are showing some signs of life. WTI crude oil is up 1% to trade north of $68/barrel, surely helped by the latest news out of the Middle East. Copper is unchanged. Gold and silver are advancing, up ~1% each;

• Cryptos aren’t doing anything. Bitcoin is unchanged at $82,800;

• Bonds also quiet. The 10-year yields 4.30%.

Today’s Known Events

Housing starts are out at 0830. Economists who were surveyed expect 1.38 million new starts, up a bit over the 1.366 billion recorded last month. Building permits are expected to hold steady at 1.45 million (1.47 million last month).

Industrial production is out at 0915. The expectation here is for an increase of 0.2% month-over-month versus 0.5% last month.

The Atlanta Fed puts out its GDPNow tracker at 1315. The expectation is for a decline of 2.1% for Q1, identical to what it was at the last iteration.

Japan, a crucial export nation, has a bunch of stuff happening tonight:

• Trade balance figures are out at 1950. Exports are expected to jump 12.1% year-over-year after 7.2% last month;

• Core machinery orders, also out at 1950, are expected to increase 6.9% YoY after 4.3% the previous month;

• The Bank of Japan decides on interest rates at 2300. The BOJ is widely expected to keep its key policy rate unchanged at 0.5%.

The Bottom Line

Parts of the housing market are starting to show signs of turning. Take Florida or Austin, Texas, two of the hottest housing markets since Covid. This makes today’s housing starts an important datapoint where the future direction of the economy is concerned.

We’ve spoken how labor market data can be a leading indicator for consumer spending and therefore economic growth. What can also happen is consumers start to feel poorer, in part because the price of their homes drop, and they start to retrench. This was, in part, the story of 2008.

Stocks On The Contrarian Radar©️

An opportune time to look at the shares of some of these home builders. Conveniently there is an ETF, the iShares US Home Construction ETF (ITB 0.00%↑) that can be used as a proxy. As you can see this has taken on water lately and finds itself at 52-week lows:

Interesting to observe, also how volume has shot up since the start of the year. Looking at some of the biggest stocks in this sector shows a similar story. Here are PulteGroup (PHM 0.00%↑), NVR (NVR 0.00%↑), and Lennar (LEN 0.00%↑):

Lennar (LEN 0.00%↑) with its $31 billion market cap is the largest of the three and — perhaps for that reason — has dropped the most. This makes The Contrarian a bit curious about whether it might present a buying opportunity.

LEN trades at:

• 10x forward earnings

• 0.9x forward sales

• 14x forward cashflows

Not bad! A quick look at the balance sheet shows LEN flush with cash — $8 billion, or more than a quarter its market cap — and manageable debt ($4.5 billion). Unfortunately $3.4 billion of the $41 billion assets are “good will.” Most of the assets ($20 billion) are “inventory.”

LEN’s margins are decent. Gross margins are just 22% versus a sector median of 38% but net income margins of 11% are much better than the sector median of 4%.

The recent trend in (certain) home prices is certainly cause for concern but a bright spot is that mortgage rates have declined. Can that turn the housing market around? Or is it on a trajectory downward? The answer to this question will likely determine Lennar’s fortunes.

Verdict: LEN is compelling but the crucial cashflow multiple isn’t low enough for The Contrarian to buy. Plus this is the mother of all cyclical stocks. If it gets a lot cheaper it will certainly be very compelling but then if it gets a lot cheaper it may very well be for good reason, namely that the housing market is crashing.

Housekeeping

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