VIDEO: Downside Guidance Could Be a Positive for This Holding

In today’s Daily Rundown video, Chris Versace discusses our Portfolio plan following the Fed’s 50 basis point rate cut and its prospects for further cuts over the coming quarter. 

Versace discusses the fresh love that the market is giving homebuilders and Builders FirstSource BLDR, and why we’ll be tuning into quarterly results tonight from Lennar LEN. 

"This could give us a better indication of what mortgage rates and their decline have and will mean for the housing market," he explained.

Finally, Versace also discusses why Terex’s TEX downside guidance is likely positive for the Portfolio’s position in United Rentals URI as well as why we’re interested in hearing from FedEx FDX after Thursday's market close. 

Transcript

CHRIS VERSACE: Hey, folks. Chris Versace here. It is Thursday, September 19th. Market is chugging higher with the S&P 500 and the Nasdaq composite tagging all time highs today. That action, as you've probably seen, is lifting the portfolio in a very nice fashion.

And as I look back and I look across the array of holdings that we have in the portfolio from Morgan Stanley, Bank of America to Builders First Source to United Rentals and some others that are focused on more interest rate sensitive areas of the economy, but also our tech exposure, I have to say that we are well positioned to capture the benefits as the fed moves into its rate cutting cycle.

Now, that's the good news. Earlier today, we also shared that we do see some obstacles ahead of the market. Whether it's the potential government shutdown, continued geopolitical conflicts, questions over the magnitude of earnings growth for the S&P 500 ahead, and other things. So while the market is in this post fed meeting, feel good mode, we're going to keep our eyes on the technicals, especially for the S&P 500 and the Nasdaq composite as they continue to melt up.

We'll also be doing that for our holdings, as well. And if some become overextended, extremely overbought, prudent portfolio management, well, that might have to come into play. But we will see. As we think about that, we're also seeing the market kind of move in what we would call some not surprising fashion.

What do I mean? Well, we are seeing some of those interest rate sensitive position parts of the market, like homebuilders and others that we're already invested in, and we have been for some time, they are getting some love. For example, Bank of America today raised their price targets on the homebuilders, including Toll Brothers, Pulte, Kb Home and Lennar. They also did it for builders first source.

And with builder, they took it to 198 from a previous price target of 165. No surprise. I still think that they're a little behind the curve on this. But as much as we're seeing that enthusiasm for housing in particular, what did we see today? Well, existing home sales in August came up short, suggesting that at least in August, we didn't really see as much benefit from the fall in mortgage rates that the market might have been hoping that we have seen.

However, mortgage rates have continued to fall as we moved into September, and obviously we're going to see them move lower even further as the Fed's 50 basis point rate cut reverberates through the market and as the Fed moves further down into its rate cutting cycle. So that keeps us long term bullish on the shares of builders firstsource. And we will probably have to do some upward adjustments for our builders price target.

One of the signposts that we'll be watching will come after tonight's close with quarterly results from Lennar. Because of when they close their quarter, this could give us a better indication of what mortgage rates and their decline have and will mean for the housing market. Remember, yesterday we did see an uptrend in August single family housing starts. We'll be looking for some follow through from Lennar after the close.

One other thing, getting back to Builders Firstsource, the company did announce a management change. The existing CEO is stepping down, although he will remain on the board. But CFO Peter Jackson will be moving into the top seat in early November. Now, Peter Jackson, that might be a name that sounds familiar. And it should. Because several months ago when we did a portfolio podcast with Builder Firstsource, that was the individual that we spoke with.

And we would say that Peter has a commanding understanding of Builders' market, its customers, which of course are all the major home builders, and its opportunities. So we think that it's going to be a very smooth transition. And we think that Peter will be a good steward for the company. You know, we don't fall in love with management teams. We will continue to stick with the data.

And as we get ready to rejigger our price target on the shares of Builders Firstsource, we're going to have to do the same for United Rentals, as well. That has moved past our price target. And of course, as we've talked about, the larger rate cut by the Fed and the expectation for more, that is a boon for these interest rate sensitive environments and interest rate sensitive companies and business models.

But as we think about infrastructure spending, lower borrowing costs are a positive. That's good not only for United Rentals, but it's also good for Vulcan Materials, Eaton and others that fall into that bucket. And waste management too, of course, for its non-residential business.

But speaking of United Rentals, there's an interesting comment out this morning by Terex, construction equipment company. They did issue some downside guidance for the back half of the year. And what they said is that their dealers are adjusting their inventory levels as end users gauge the macro environment.

Now, we are going to want to watch how this develops given the Fed rate cut. But our thinking is that in an uncertain market for demand, companies might push off, excuse me, buying new equipment, but that tends to benefit their renting equipment. So what Terex could see as some pain that actually could boost rental utilization levels for united rentals. So we'll be looking for some incremental comments on that in the coming weeks.

But again, we are going to have to probably revise our price target for United Rentals higher. One other thing coming up after today's close, we do have quarterly results from Fedex. And while we're not in that stock, we will be interested in what it says about the overall economy. Remember, Fedex tends to report early ahead of the vast majority of companies. So it's kind of a leading indicator of sorts. But we will be interested in its comments about the overall global economy.

We will also be interested in what its guidance kind of says about the holiday shopping season. Remember, earlier this week, we shared a forecast from Deloitte with you about the holiday shopping season, that it sees digital shopping growing magnitudes higher than overall holiday sales this year.

I want to say the overall numbers for the holiday shopping season per Deloitte is up 2.3 to 3.3% with digital shopping up 7, 8% or so, maybe even slightly higher. Of course, that keeps us bullish as we discussed previously on Amazon and Costco's business. But we will be parsing other holiday shopping season forecasts as we get them.

So all in all, just to wrap it up, I think coming out of the Fed meeting, we are going to be cautious watching those technical levels. But as we look at the portfolio as it sits today, extremely well positioned. But we will continue to remain prudent, disciplined investors. We're going to stick to our investment strategy of looking for well positioned companies that are poised to deliver superior earnings growth.

And we can pick up the shares at a favorable, if not compelling, risk to reward trade off. So with that, my friends, be sure to check your emails, check your alerts. We want to make sure you're getting our latest thinking. But again, if we make any moves with the portfolio, we want to make sure that you are right there with us. Thanks for watching.

At the time of publication, TheStreet Pro Portfolio was long BLDR and URI.