By Jacob Sonenshine
Bond yields may have topped out. That would be great news for housing stocks.
The sector has had a tough April. The SPDR S&P Homebuilders exchange-traded fund has slipped 8.1% last month, even worse than the S&P 500's 4.2%.
Blame is easy to apportion. The average 30-year fixed mortgage rate in the U.S. has climbed to 7.2%, up from about 6.6% during the first few weeks of the year, amid concerns that persistent inflation will force the Federal Reserve to leave interest rates higher for longer. That's not all that far away from the multidecade high of 7.8% hit in November.
Mortgage rates now look close to peaking. That's because they tend to follow the 10-year Treasury yield, which looks unlikely to rise much further than the 5% it hit at its peak last year. Higher yields often become their own reason to buy bonds. That's especially true if the Fed maintains a bias to leave rates unchanged -- or even lower them -- which makes the yields look attractive enough for investors to want to lock them in. (Bond yields move in the opposite direction of prices.)
Yields look likely to "digest" their recent gains, and should flatline or even dip in the near term, writes Sevens Report's Tom Essaye.
That would boost home-building stocks. In the past year, the SPDR S&P Homebuilders ETF has risen in multimonth periods when mortgage rates dip, according to FactSet data. The fund owns home construction stocks Toll Brothers, Lennar, and D.R. Horton, home-improvement names Lowe's and Home Depot, and even building-materials makers such as Vulcan Materials. The ETF is down to $102 from its all-time high of $111 hit in late March. The move lower corresponds with a sudden spike in mortgage rates.
Lower rates, if they come, would be good news for the entire group, but the best names to own are the ones with particularly strong growth. Remember, home builders aren't just a play on new-home sales -- many of them are enterprising companies that are looking for unique ways of growing profits.
Lowe's, for example, looks set for a tough 2024. Analysts expect another slight decline in sales as do-it-yourself customers spend less on home goods. Next year should be far better, with same-store-sales growth rebounding to almost 3%, resulting in sales of $86.9 billion and earnings back above $13 a share, according to FactSet.
Beyond 2025, sales can grow at a steady 3.5% clip to over $96 billion by 2028. Supporting that growth is the company's ongoing expansion in its pro business. (That's industry lingo for sales made to contractors, who are hired by wealthier consumers to do the work rather than do it themselves.) The pro business also earn higher margins and can grow faster than DIY. That's one of the reasons analysts expect earnings-per-share to grow 11% annually to over $18 by 2028.
That's far better than the mid-single-digit earnings growth forecast for the companies in the fund -- and makes Lowe's stock an interesting place for investors to set up home.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
To subscribe to Barron's, visit http://www.barrons.com/subscribe
(END) Dow Jones Newswires
May 03, 2024 21:30 ET (01:30 GMT)
Copyright (c) 2024 Dow Jones & Company, Inc.
Comments