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Demand Builds for Home Building Suppliers

By Linda McDonough on July 26, 2017

Peter Lynch, the legendary portfolio manager of Fidelity’s Magellan fund, was infamous for simplifying the investment process for mom and pop retail investors. Amongst his most famous mantras was to invest in what you know.

While he specifically meant invest in an industry where you might have special career knowledge, many analysts (myself included) expanded this thought process to picking up investment clues while out and about in the world.

This happened to me just last weekend. What I thought would be a quick trip to the tile store ended up being a two-hour affair due to the crowded showroom. I live in a fairly urban area and had at least six big tile shops to choose from, so lack of supply is not a factor in this story.

After finding the very last parking spot at the tile store, I proceeded to be jostled about by the crowd inside. Hailing a sales person to place an order felt like stalking a celebrity for an autograph.

Once I placed the order, I proceeded to wait in a ten person long line at the warehouse door to accept delivery. The bustle of this store in conjunction with the difficulty I’ve had in finding available contractors to perform the noted tile work (I’m best at desk jobs) led to me to revisit the bull scenario for home building supply stocks.

Newly released economic data detailing new home starts and permits support the bull thesis. After a tepid report in April and May, June showcased a 6% increase in new single family home starts, a 13% increase in multi-family starts and a 7% jump in permits filed.

But the number of new homes being built is not the only data point for measuring demand of building supplies. Existing home sale counts also provide investors with a strong clue on future demand.

After all, most home projects are initiated either right before or right after a home sale. Anyone who’s ever ripped up a shag carpet or painted walls before moving in can attest to the energy and money expended before calling a place your own.

June’s existing home sales number was down versus the prior month but is still rising from last year’s number. Prices leaped 6%, an indication that high prices might be keeping first-time buyers out of the market. These buyers will spur another wave of demand should prices drop.

The good news for investors is that building supply stocks tend to be quite volatile. Disruptions in labor supply and raw material markets can cause quarterly earnings to go haywire. The price drops in those stocks offer investors a fabulous opportunity to get involved at lower prices.

I’m a big believer that most well-run companies can get earnings back on track after an unusual miss. The environment right now, with the supply of labor very tight, is likely to cause some unexpected jolts to earnings. The recently enacted Canadian lumber tariff is another issue that might wreck some quarterly reports. That tariff has thrown fuel onto already high lumber prices and could cause a kink in the supply chain.

I have just one stock in the Profit Catalyst Alert portfolio tied directly to the housing industry but am looking for more. I sold out one of my favorites this spring with a 66% gain in seven months and have my eyes open for any sell-offs that offer good entry points.

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