The last few weeks have been far more than just interesting. We’ve been barraged by a number of winter storms that are taking their toll on January economic data. We’ve already heard of disappointing January car and trucks sales. We received official word this week that January housing activity was slower than expected. Given the severity of the winter weather, was any of that really a surprise to you?
I should hope not.
But as I have informed subscribers of my investment newsletter PowerTrend Profits, the stock market in 2014 is going to be very different from the stock market of 2013. Last year, it was very easy to make money in the market. As the trite saying goes, a rising tide lifts all boats. When the S&P 500 is up some 30%, most investors are making out. The 2014 version of the market will reward good stock pickers but leave other people unfulfilled. That situation means not only rolling up your sleeves to do your homework, but also understanding which industries will continue to flourish and which will start to peter out. More on that can be heard in my 2014 market outlook.
As an example, let’s take a look at the housing industry. In the last few days alone, we’ve had weaker-than-expected January housing starts and building permits, a miss on the National Association of Home Builders (NAHB)/Wells Fargo housing market index for February and figures from the Federal Reserve Bank of New York showing that household debt (mortgages, credit cards, auto loans and student loans) jumped $241 billion between October and December to $11.52 trillion. Layer in this week’s drop in the Mortgage Bankers Association weekly mortgage application survey, which showed the Purchase Index component at its lowest level since September 2011, and one would think housing stocks are pulling back across the board.
Instead, it’s a mixed bag, with some homebuilders outperforming the broader market indices thus far in 2014 and some dragging way behind. The shares of homebuilder DR Horton (DHI) are up 5% year to date, and NVR (NVR) shares are up an impressive 13% on the same basis. With shares in both companies climbing, you have to think the stock market is looking past recent weather disruptions and their impact. But the outperformance enjoyed by those homebuilders is not universal. There are a number of homebuilders whose shares have taken a bunch of lumps during the last few weeks — Standard Pacific (SPF), MDC Holdings (MDC), Hovnanian (HOV), M/I Homes (MHO) and Beazer Homes (BZH) are all down between 6-14% year to date.
To me, this dichotomy reinforces something I have known for some time — not all homebuilders are the same. Coming off of a depressed housing market, a rising tide tends to lift all boats. Much like the stock market this year, choosing a homebuilder to invest in this year requires you to be far more choosey than in the last few years. That reality means getting the answers to questions like the following: Which homebuilders have the better parcels of land in the more desirable areas to live with the better school systems? Which homebuilders have captive mortgage operations that can goose profits and close homes? Is the backlog rising? Is pricing in the backlog rising? What’s the cancellation rate? Is the homebuilder using more incentives to close deals?
Now you can go through all of that and ferret out which of the dozen or so homebuilders is the best one to buy.
I personally prefer to invest in the parts of the stock market that have clearer signs of demand, particularly ones with ample demand ahead. Data from research firm Polk shows the average age of light trucks to be more than 11 years old — the highest it’s been for the last 10 years. Data from Experian Automotive shows that the average age of all medium-duty vehicles was 11 years, while heavy-duty vehicles averaged 12.3 years. That market research factors in the strong year of automotive sales we saw in 2013. Yet, there is far more upside to go.
Combine those vehicle ages with news this week that President Obama is driving (no pun intended) another round of engine emission standards to be phased in by 2016, and it means the next two years should be robust ones for the auto and truck industry. Consumers, businesses and others will buy more cars during the next two years to avoid price hikes that inevitably will occur in 2016 when vehicles will be equipped with increasingly expensive engines to comply with the next round of emissions regulations. In economic terms, vehicle buyers will be pulling demand forward. Historically, once that mandate deadline passes, we will see a drop-off in demand. While that’s not great news for 2016, it sure is good news for the next two years.
That’s just one example of why I keep close tabs on the shifting regulatory environment coming out of Washington, D.C., as well as the potential pain points that could ensue. After all, pain points make for some of the best investing opportunities.
Don’t take my word for it, just ask a subscriber to PowerTrend Profits!
The Current State and Future of Mobile with Qualcomm’s Bill Davidson
Joining me on PowerTalk to discuss the state of the mobile industry today, and where it’s headed tomorrow, is longtime friend Bill Davidson from Qualcomm, Inc. (QCOM), a key technology company in the mobile revolution. Bill is a senior vice president of Strategy and Operations at Qualcomm Technologies, and he also heads up Qualcomm’s Investor Relations. I’ve known Bill for more than a decade, and I’ve found him to be a fountain of information and insight over the years.
During our conversation, we talk about the existing mobile markets and why there is plenty of growth left in smartphones and tablets. We also discuss a number of up-and-coming mobile markets — The Connected Car, The Connected Home, wearables, mHealth, mobile payments and more. With all of these new markets coming on stream, you’re right to think that this will put a huge burden on mobile operators like Verizon, AT&T and others. But as Bill shares, Qualcomm is already tackling that particular pain point.
After today’s PowerTalk that truly takes you behind the scenes and in the know when it comes to mobile and to Qualcomm, you’ll see that we are still only in the early innings of the mobile revolution.
Disclosure: Qualcomm Inc. (QCOM) shares were recommended to subscribers of my investment newsletter PowerTrend Profits last April at $64.01. Chris Versace owns no shares in any of the companies mentioned above. The Thematic Growth Portfolio managed by Chris Versace owns shares of General Motors (GM).
NOTE: Fabian Wealth Strategies is a Securities and Exchange Commission-registered investment adviser, and is not affiliated with Eagle Publishing.
In case you missed it, I encourage you to read my PowerTrend Brief from last week about how dividends indicate upside in stocks. I also invite you to comment in the space provided below.