Alan Brochstein: Auto Stocks May Be Attractive Compared to Housing Stocks
Alan Brochstein takes another look at Homebuilders
Six months ago, just before the investing landscape changed rather dramatically following the U.S. budget impasse that resulted in a downgrade of our debt by Standard & Poors and the meltdown in European sovereign debt, I suggested taking a look at Homebuilders, truly a contrarian strategy at the time. While my call proved to be premature, the stocks have fully recovered and then some. At this point, I feel a responsibility to share my updated views, as it appears to me that there is now a bit too much enthusiasm.
Prices plunged, not surprisingly, as the summer progressed, as the rebound I was anticipating for new housing construction was delayed. I still believe that the industry will improve over time, but the stocks may be getting ahead of themselves. At this point, I think that the group of housing-related stocks looks expensive compared to another key economically-sensitive group, the auto manufacturers and their suppliers.
Before I share some data and observations, it’s important to understand that new auto sales have plunged in the past few years too as the industry was nearly wiped out in the Great Recession. At this point, access to credit for buyers is improving, and it’s proving much easier for borrowers to fund car purchases compared to homes. While housing will likely recover, it’s easier for me to envision improvement in autos.
One big difference, though, is that housing is purely domestic, while the auto industry is global. Not only are there concerns about European demand, but the Thai flooding this past summer (which followed the Japanese disaster of the spring), has led to all sorts of near-term component challenges. As a consequence of changes in the perceptions of U.S. recovery compared to the global economic outlook, investors have turned away from the auto stocks. Take a look for yourself:
Prices plunged, not surprisingly, as the summer progressed, as the rebound I was anticipating for new housing construction was delayed. I still believe that the industry will improve over time, but the stocks may be getting ahead of themselves. At this point, I think that the group of housing-related stocks looks expensive compared to another key economically-sensitive group, the auto manufacturers and their suppliers.
Before I share some data and observations, it’s important to understand that new auto sales have plunged in the past few years too as the industry was nearly wiped out in the Great Recession. At this point, access to credit for buyers is improving, and it’s proving much easier for borrowers to fund car purchases compared to homes. While housing will likely recover, it’s easier for me to envision improvement in autos.
One big difference, though, is that housing is purely domestic, while the auto industry is global. Not only are there concerns about European demand, but the Thai flooding this past summer (which followed the Japanese disaster of the spring), has led to all sorts of near-term component challenges. As a consequence of changes in the perceptions of U.S. recovery compared to the global economic outlook, investors have turned away from the auto stocks. Take a look for yourself:
Before I describe the data, please keep in mind that these are not recommendations. You should do your own research before making any investment.
So, what’s going on here? I have separated the list into two components: Housing-related (Orange) and Auto-related (Green). I have also included some summary information (medians) as well as the details on several different metrics. First, the two lists are sorted by 3-month price return. Overall, the housing-related stocks, which include the home-builders as well as thee home-improvement retailers, have rallied 36% (3% to 71%) over the past three months, while the auto-related stocks have improved just 5% (-31% to +31%).
By the way, included in this group is Lowes (LOW), which I wrote about very favorably in 2010. Once again, I was a bit early! It is the only stock on this entire list that I cover closely, and I believe that it is ahead of the fundamentals.
I have included the net debt to capital, which shows that the auto-related stocks typically have a better balance sheet. I have also included columns to show how far from the 52-week high and low each of the stocks is currently. In general, the housing-related stocks are just 11% below their highs but 63% above the lows, while the auto-related stocks are still 32% below the highs and only 30% above the lows.
The valuations are clearly lower on a PE basis for the auto-related stocks, with the median PE below 8X. The vast majority of the companies trade below 10PE, and all are expected to be profitable. Many of the housing-related stocks are not expected to be very profitable, if at all, over the next year, and the typical PE is 33X. This data is based on Baseline.
The last column is short-interest, and I include it because I think it may help explain why the housing-related stocks are doing so well. I have highlighted all of the names with more than 10% short-interest, and there are several housing-related stocks that are heavily shorted. The typical short-interest ratio is 10% for the housing-related stocks but just 4% for the auto-related companies.
As I mentioned, I don’t actively follow any of the auto-related stocks. As I look at the list, the ones with low or no net debt certainly jump out. As I look more closely, I will be checking for exposure to Europe, which is likely to be slow, as well as to emerging economies, which are likely to see continued demand.
Just as I said back in July when discussing the 10 Homebuilders, if you like to consider contrarian investments, I believe now may be the time to begin to look at the automobile suppliers. Perhaps the home-builders and related stocks will continue their recovery, but they are no longer so contrarian. I have shared some metrics on the auto-related stocks, which hopefully gets you started in the right direction on your own research process.
Regards,
Alan Brochstein
Founder, Invest By Model and AB Analytical Services
TradeKing All-Star Commentator
Disclosure: No positions in any stock mentioned
In reading content in the Trader Network, you may gain ideas about when, where, and how to invest your money. Although you may discover new ideas or rationale that may be compelling, you must ultimately decide whether or not to put your own money at risk. Consider the following when making an investment decision: your financial and tax situation, your risk profile, and transaction costs.
Alan Brochstein maintains a cross-marketing relationship with TradeKing.
TradeKing selects and defines as All-Stars certain independent market commentators who are recognized industry personalities and experienced traders and who provide timely market commentary via the TradeKing All-Star blog at http://community.tradeking.com/members/tk-all-star/blogs. Each All-Star commentator’s bio, related qualifications and disclosure as to their relationship with TradeKing can be found on the All-Star blog roster, available at http://community.tradeking.com/members/tk-all-star/details. The selection of All-Stars commentators is solely based on the quality and style of the content provided. TradeKing does not measure, endorse, or monitor the performance or correctness of any statement or recommendation made by independent All-Stars commentators on TradeKing.com. Supporting documentation for any claims made in this post will be supplied upon request by the author of the post, Alan Brochstein, who is solely responsible for the views expressed here. Send a private message to All-Stars using the link below the profile image.
Any strategies discussed and examples using actual securities and price data are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. In reading content in the Trader Network, you may gain ideas about when, where, and how to invest your money. Although you may discover new ideas or rationale that may be compelling, you must ultimately decide whether or not to put your own money at risk. Consider the following when making an investment decision: your financial and tax situation, your risk profile, and transaction costs.
So, what’s going on here? I have separated the list into two components: Housing-related (Orange) and Auto-related (Green). I have also included some summary information (medians) as well as the details on several different metrics. First, the two lists are sorted by 3-month price return. Overall, the housing-related stocks, which include the home-builders as well as thee home-improvement retailers, have rallied 36% (3% to 71%) over the past three months, while the auto-related stocks have improved just 5% (-31% to +31%).
By the way, included in this group is Lowes (LOW), which I wrote about very favorably in 2010. Once again, I was a bit early! It is the only stock on this entire list that I cover closely, and I believe that it is ahead of the fundamentals.
I have included the net debt to capital, which shows that the auto-related stocks typically have a better balance sheet. I have also included columns to show how far from the 52-week high and low each of the stocks is currently. In general, the housing-related stocks are just 11% below their highs but 63% above the lows, while the auto-related stocks are still 32% below the highs and only 30% above the lows.
The valuations are clearly lower on a PE basis for the auto-related stocks, with the median PE below 8X. The vast majority of the companies trade below 10PE, and all are expected to be profitable. Many of the housing-related stocks are not expected to be very profitable, if at all, over the next year, and the typical PE is 33X. This data is based on Baseline.
The last column is short-interest, and I include it because I think it may help explain why the housing-related stocks are doing so well. I have highlighted all of the names with more than 10% short-interest, and there are several housing-related stocks that are heavily shorted. The typical short-interest ratio is 10% for the housing-related stocks but just 4% for the auto-related companies.
As I mentioned, I don’t actively follow any of the auto-related stocks. As I look at the list, the ones with low or no net debt certainly jump out. As I look more closely, I will be checking for exposure to Europe, which is likely to be slow, as well as to emerging economies, which are likely to see continued demand.
Just as I said back in July when discussing the 10 Homebuilders, if you like to consider contrarian investments, I believe now may be the time to begin to look at the automobile suppliers. Perhaps the home-builders and related stocks will continue their recovery, but they are no longer so contrarian. I have shared some metrics on the auto-related stocks, which hopefully gets you started in the right direction on your own research process.
Regards,
Alan Brochstein
Founder, Invest By Model and AB Analytical Services
TradeKing All-Star Commentator
Disclosure: No positions in any stock mentioned
In reading content in the Trader Network, you may gain ideas about when, where, and how to invest your money. Although you may discover new ideas or rationale that may be compelling, you must ultimately decide whether or not to put your own money at risk. Consider the following when making an investment decision: your financial and tax situation, your risk profile, and transaction costs.
Alan Brochstein maintains a cross-marketing relationship with TradeKing.
TradeKing selects and defines as All-Stars certain independent market commentators who are recognized industry personalities and experienced traders and who provide timely market commentary via the TradeKing All-Star blog at http://community.tradeking.com/members/tk-all-star/blogs. Each All-Star commentator’s bio, related qualifications and disclosure as to their relationship with TradeKing can be found on the All-Star blog roster, available at http://community.tradeking.com/members/tk-all-star/details. The selection of All-Stars commentators is solely based on the quality and style of the content provided. TradeKing does not measure, endorse, or monitor the performance or correctness of any statement or recommendation made by independent All-Stars commentators on TradeKing.com. Supporting documentation for any claims made in this post will be supplied upon request by the author of the post, Alan Brochstein, who is solely responsible for the views expressed here. Send a private message to All-Stars using the link below the profile image.
Any strategies discussed and examples using actual securities and price data are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. In reading content in the Trader Network, you may gain ideas about when, where, and how to invest your money. Although you may discover new ideas or rationale that may be compelling, you must ultimately decide whether or not to put your own money at risk. Consider the following when making an investment decision: your financial and tax situation, your risk profile, and transaction costs.
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