An Energy Name to Buy As Rebound Seems Likely
The market may seem contradictory and uncertain, but this energy position is one of the few places I'm finding good value.
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Watching the economy and markets provides a daily mix of bewilderment and contradiction these days.
On Tuesday, we saw the monthly consumer confidence reading with its biggest month-over-month rise since March of 2021. The same day, monthly job openings dived to under 7.5 million, the lowest level since early 2021. Consumer confidence spiked despite just over a quarter of Americans believing the country is heading in the right direction in front of another contentious election, whose result may or may be known shortly after election day. Keeping with the theme of bifurcation, here are a couple of quick takes on two different sectors of the market and economy.
As I have stated many times on these pages, home building stocks are very vulnerable to pullbacks at current trading levels. I thought that before the central bank implemented its 50 BPS cut to the federal funds rate and even more so after the sector rallied higher after that event. Contrary to expectations, the yield on the 10-year treasury has risen by more than 60 BPS since the interest rate reduction at the September FOMC meeting. This rise has taken mortgage rates up with it. The rise has meant a potential home buyer purchasing an average home has lost over $30,000 of their buying power. Existing home sales now look like they will come in lower in 2024 than in 2023, and 2023 saw the lowest levels of existing home sale activity since 1995.
It does seem that the market is finally realizing the home building sector is significantly overvalued as the SPDR S&P Homebuilders ETF XHB has now given back most of its almost-15% post fed funds rate cut rally. D.R. Horton DHI fell just over 7% in trading on Tuesday even after announcing it would hike its dividend by a third. The major home builder missed both top and bottom expectations with its quarterly earnings report as sales fell nearly 5% on a year-over-year basis. Leadership also offered up FY2025 revenue guidance that was far under the analyst community consensus.
Prior to Tuesday's post-earnings slide, DHI was trading at a price-to-book value of 2.32. The only time it has been valued slightly higher was at the end of 2021 (2.34). The stock then plunged some 40% over the next six months and finally bottomed out early in the fourth quarter of 2022 at 1.15 times book value for what it is worth.
Oil had one of its worst one-day selloffs in a few years on Monday after Israel’s retaliatory strike over the weekend did not hit Iran’s energy or nuclear facilities as feared. I added some shares in the Energy Select Sector SPDR Fund ETF XLE via covered-call orders on the corresponding drop in oil prices. This well-diversified ETF yields 3.4% and has dropped some 9% over the past six months. Tensions are still running high in the Middle East; Yemen is still menacing oil transport in the Red Sea and the conflict in Ukraine continues unabated. With oil near a three-year low, a rebound seems likely, and I am finding some decent value in many energy names. Something I can’t say around the overall market.
At the time of publication, Jensen was long XLE.
