We Are Calling Up a New Portfolio Position From the Bullpen
Our intiation reflects a business model that sets up well as rate-cut prospects improve.
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* We are starting a position in Builders FirstSource with a One rating and a $205 price target.
* We are making this move because of the improving outlook for rate cuts over the coming quarters and its impact on the housing sector.
* Builder’s arms merchant business model and increasing dollar content per home sets the stage for revenue and EPS growth as the housing market rebounds.
| Symbol | Transaction Type | # Shares Traded | Recent Price $ | Shares Owned After Trade | % Portfolio |
|---|---|---|---|---|---|
BLDR | Buy | 380 | 152 | 380 | 1.3 |
After you receive this Alert, we will buy 380 shares of Builders FirstSource BLDR at or near $152. Following the trade, BLDR will account for 1.3% of the portfolio’s assets.
After keeping Builders FirstSource in the Bullpen for several months, and watching the share price move lower, we are calling up the shares and initiating a starter position with a price target of $205. The upside to that target has us rating BLDR shares a One. Near the $180 level, we would begin to re-think that rating, but if housing market data rebounds quicker than expected, we may need to lift our price target. To that end, we will continue to watch the economic landscape for more of that “good data” needed by the Fed to build its rate-cut confidence.
In yesterday’s video, we explained how the Fed’s updated set of economic projections are already modestly out of date following the May CPI report, with Fed Chair Powell admitting some aspects of those new projections are conservative. This has the market thinking that even though the Fed may see one rate cut this year, the door is open for two.
To that we can add this morning’s May PPI report that showed headline inflation fell 0.2% month over month with core PPI coming in at 0.0% on that basis, well below the 0.3% market forecast. All in all, it was another “good data” inflation data point, and one that will tip the market toward the potential for more than one rate cut late this year. Based on the back-to-back May CPI and PPI data points, we are softening our view for just one rate cut later this year, but we will need to see further progress in the June, July, and August data to build our confidence.
But we can’t ignore the forward-looking animal that is the stock market, and that means when we look at the Fed’s updated economic dot plot through 2025 it shows the potential for five rate cuts over the next six quarters. The market is going to see that benefiting interest rate-sensitive parts of the economy, including housing. The thinking is lower mortgage rates will improve overall affordability, driving a rebound in demand.
We are selecting BLDR as a play on that because of its arm merchant status with all the major homebuilders and key regional ones as well. Builder’s strategy of growing its dollar content with homebuilders as they look to modularize and outsource more of their production is one we’ve seen be successful across other industries, allowing companies using that strategy to drive revenue and earnings growth faster than the industry.
The risk to adding BLDR shares to the portfolio today is we are early in making this move and the economy slows more than expected. As we think about that, Powell’s comment that the Fed doesn’t want something to break for it to start cutting rates suggests the central bank is mindful about extending the economic cycle. Even so, we will maintain our portfolio discipline and set our starting our panic point at $130, but like we’ve done with other holdings, we will boost that level as BLDR shares move higher.
We would encourage members to go back and listen to our March podcast conversation with Builder’s CFO Peter Jackson.
(Please note that we are looking to execute these trades at or near the share price mentioned above. Once the trade is completed, subscribers can see the trade's executed price here. Be sure to toggle the chart to sort by Purchase Date.)
At the time of publication, TheStreet Pro Portfolio had no positions in any securities mentioned.
