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The Oxen Report: Existing Home Sales Set to Rise But Markets Set to Fall?

Happy Monday to all! Hope everyone had a great weekend. We are set to begin a fantastic week of stock picking, analysis, and conversation about everything financial. Last week was a bit of a rough week for us investors as we got hit by some poor news from the Euro and several key economic indicators. You can read my entire synopsis of the week and my seven picks from last week here. We had 2 winners, 2 losers, and 3 neutral plays, which is not bad for a week when the market drops 5%. 

Let’s get into today’s plays…

 

Buy of the Day: Pulte Homes Inc. (PHM)

Analysis: I am surprisingly not that worried about the market’s futures this morning. I think it is definitely some worries over Europe that are driving futures down on the Dow over 70 points, but it is also simply some profit taking that is occurring as investors who made money on Friday don’t want to lose their gains. Well, I think they would have been better off hanging onto some of those stocks because the market is going to turn around today. For one, we have some undervalued news coming our way this morning about existing home sales, which has continually risen year-over-year thanks to a tax credit. This is the last month of the tax credit, and the analysts are only thinking it will rise 6% above the numbers from last year. The total number of existing homes sold is expected to be 5.65 million, which is 300,000 more than the numbers for March. I think this piece of economic data alone should give a boost to a number of stocks, especially homebuilders themselves, who have been heavily oversold over the past few weeks.

My selection for today, therefore, is PulteGroup Inc. (PHM). Pulte is a typical middle-class residential homebuilder that specializes in neighborhoods built on developed land. While the company does not benefit greatly from the rise of existing home sales, a rise here shows that the market for homes is strong, which means that new buyers are building. This statistic should go along with a reminder to investors that new housing starts were also better than expected in April, which is further good news for PHM. 

The news about the home sales should be released at 10 AM. I am expecting that PHM and other stocks that are closely linked to the statistic will probably actually have a strong first thirty minutes, so we want to get involved with this one right away. We may even be able to make 2-3% before the announcement just in case it is really awful; however, I am pretty confident that any rise from last month will be taken very well. 

Additionally, what is helping this stock is the fact that it is so undervalued like the rest of the market. The stock is heavily oversold, undervalued on RSI, and right at its lower bollinger band. How much further can it decrease? As you look at any sector or company, they are all oversold and at the bottom of those bollinger bands even after a slight pop on Friday. The market, technically, just does not have enough momentum to carry it lower on the same news about the Euro and Europe. I think investors are ready to move onto something new. Look to the existing home sales, some good earnings from Campbells and Yingli Green, and IBM’s M&A with ATT to all help spark this market.

Get in early and watch for the 10 AM announcement.

Entry: We are looking to get involved with PHM at 10.95 – 11.05.

Exit: We are looking to exit on a 2-3% gain.

Stop Loss: 3% on bottom.

 

Short Sale of the Day: Proshares Ultrashort Financial (SKF)

Analysis: Along the same lines as the first article. I am expecting the market to rise from a bottoming this morning. The market rose on Friday, and it has created a short term selling spree in pre-market, but the Euro and Europe story is dried up. I think investors will look at the acquisition IBM took on today, the existing home sales, and some solid earnings from a couple smaller companies as just a number of bullish factors. Yet, it comes down to technically we just do not have the momentum to continue lower. There are too many bargains, and the first sign of any bullish fundamentals (like Friday), this market will take off.

With that said, I think shorting some of these volatile inverse ETFs is a great idea. SKF is one of those quiet ETFs for awhile since financials seem to have slipped under the radar over the past couple weeks. During that time, SKF has seen its price rise around 30%. It is heavily overvalued, and it is ready to come down. The stock has too many buyers, and as those buyers turn into short interest this one is going to fall hard and fast.

Yet, SKF cannot just fall for no reason. I think to help fuel this one, besides the market approach, is the new financial rules that Congress has passed. While the law has flaws, it does give more strength to the financial industry by providing some more stringent rules to help cause the banking industry not to falter. While some interpret this as harder for the banks to make money, it is not that way. This law is designed to basically do away with the types of malpractice that started this whole process of unfolding. Money that banks are making now is smarter and safer, and this law does not affect that money. Further, Goldman Sachs gave an upgrade to Citi (C) today, and the projected costs of the TARP legislation are seen to be lower than previously thought. 

Those are all good signs for the financial industry and should help lend a hand in bringing down SKF.

Entry: We are looking to get involved with our short sale at 21.45 – 21.55.

Exit: We are looking to cover on a 2-3% gain.

Stop Buy: 3% on top.

 

Good Investing,

David Ristau

 

This entry was posted on Monday, May 24th, 2010 at 8:52 am and is filed under Uncategorized. You can leave a response, or trackback from your own site.

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Comments



  1. David Ristau
    May 24th, 2010 at 9:20 am | PermalinkIgnore this user

    Oxen Alert and Morning Levels

     

    I have a new post available for your reading. It is looking at a buy selection in PulteGroup Inc. (PHM) and a short sale in Ultrashort Proshares Financials ETF (SKF). We are looking to make 2-3% on both today.

     

    On the morning levels, as I expected, futures have come down, which will change our entry prices.

    PHM: We were looking for an entry of 10.95 – 11.05, and we should increase that to 11.05 – 11.25. I increased the range to get involved off the bat. I don’t think we want to miss this one.

    SKF: We are moving our entry down to 21.05 – 21.15 for our short sale entry.

     

    Good Investing!

  2. David Ristau
    May 24th, 2010 at 9:32 am | PermalinkIgnore this user

    PHM opened way below my range, which is fine. We are getting involved per my morning alert.

  3. David Ristau
    May 24th, 2010 at 9:34 am | PermalinkIgnore this user

    In PHM at 10.73.

  4. David Ristau
    May 24th, 2010 at 9:37 am | PermalinkIgnore this user

    Oxen Alert Entry/Exit

    PHM – We got involved at 10.73 this morning, and we are looking to exit from the range of 10.94 – 11.04. This one is rising so get involved while you still can.

    SKF – We got involved at 21.15. We are a little in the red right now as SKF has moved into the 21.30s. It is still a long day, and I think this quick pop will reverse. We are looking for an exit around 20.73 – 20.51 for 2-3%. 

    Good Investing!

  5. David Ristau
    May 24th, 2010 at 10:06 am | PermalinkIgnore this user

    Existing home sales beat estimates and up 7.6%…woot!

    From Marketwatch.com:

    Resales of homes in the United States rose 7.6% in April to a seasonally adjusted annual rate of 5.77 million as buyers rushed to complete sales before a tax credit expires, according to data released Monday by the National Association of Realtors. Sales were stronger than the 5.63 million pace expected by economists. Inventories surged 11.5% to 4.04 million in April, an "unwelcome" development, said Lawrence Yun, chief economist for the NAR. The inventory level represented an 8.4-month supply at the April sales pace. Yun said the elevated inventories suggest that prices won’t rise much over the next year or two. The median price is up 4% in the past year at $173,100.

    Go PHM!

  6. David Ristau
    May 24th, 2010 at 10:08 am | PermalinkIgnore this user

    Out of PHM for 3% gain!!!

  7. David Ristau
    May 24th, 2010 at 11:01 am | PermalinkIgnore this user

    The Daily Musing: Should We Be Too Excited About the Housing Market?

    The housing market had another stellar beat of market estimates this morning with existing home sales hitting 5.77 million for the annual rate after April numbers were released. The 7.6% increase from March to April was much better than the 6.8% increase expected. Further, last week, the housing market got more good news that housing starts were still positive in April at 670,000, beating estimates by 10,000. Housing starts continuing to rise…existing home sales rising as well… Its all looking quite good in the housing market. Right?

    The problem for the housing market lies in the expiring tax credit for homebuilders and an increasing inventory problem. In April, inventories rose 11.5%, which means lots of people are moving out of their homes and trying to sell them. Unfortunately, it is not because everyone is buying new homes. It is because most Americans are having to downsize, find new jobs in new locations, or trying to make some money off their home to keep their heads above water. 

    The tax breaks that have been available to first-time home buyers over the past fifteen months are now expired. With the tax credits up, it may spell doom for the home industry’s demand. One signal of that fact is that building permits are dwindling, meaning builders are not actually seeing that demand will be available. Permits fell in April from March to only 610,000. Without the tax credit, does the housing market shore up?

    Prices are still relatively low on existing houses, with the median price in the $170,000 range. Further, many foreclosed homes are still very cheap. With cheap houses and foreclosed homes, the existing home market makes much more sense to stay afloat than the new home market – thus the drop in building permits. It is hard to justify with unemployment still high and struggling to drop and no tax credit to ease buyers into the market, much out of the new home sales. This puts residential builders at a tough spot to be able to sustain consistent business.

    If there is no new tax credit passed, it may still be quite some time before the likes of PulteGroup Inc. (PHM), Lennar (LEN), KB Homes (KBH), and Hovnanian Enterprises (HOV) can really turn the corner and be investments that I can recommend. I would stay away from these. Additionally, high end homes like Toll Brothers (TOL) and Ryland (RYL) are definitely ones to avoid. If you do want to look at residential construction, we want to look low-end. In the residential market, the low-end continues to thrive for DR Horton Inc. (DHI). This would be one of the only residential companies that could still turn profits and is a decent pick up at its current prices.

    With the existing market continuing to probably be sustainable until unemployment starts to drop, I would look to some of the REIT – Residential companies to be able to continue to do well in the market that own, manage, and sell existing homes and apartments. Some of my favorites in this industry include Equity Residential (EQR), UDR Inc. (UDR), and Essex Proprety Trust (ESS).

    While the housing market has had some sustainability over the past year, it may start to dwindle away again and retest some of the earlier woes that it had two to three years ago over the next year. Congress may decide to continue the tax credit, but there has been little talk of it so far.

    The last hurrah for the housing spike may have hit for some time.

    Good Investing,

    David Ristau

  8. David Ristau
    May 24th, 2010 at 11:25 am | PermalinkIgnore this user

    Oxen Alert – Position Update

    Well, well… I have gotten 1/2 of what I expected, but we are still waiting on a big lift for the market. Existing home sales beat, but it has not been able to get the market over the hump.

    PHM - We got involved right off the bat this morning at 10.72. We were then able to exit after our entry at 11.04 for a 3% gain on the day!

    SKF – We are still waiting for this one to make its way back down. We got involved at 21.15, and we are down about 2% currently. As the market rises, it moves down. We need a rally!

    Good Investing!

  9. David Ristau
    May 24th, 2010 at 12:03 pm | PermalinkIgnore this user

    Oxen Alert – Midday Message

    Hey all, market is getting closer and closer to the green zone, which is great news for us as we are shorting an inverse ETF. We have already made one trade good for 3%, and we are looking to add to that success.

    PHM – This was our first winner, which we got involved with at 10.70 and sold at 11.04 already this morning.

    SKF – This is our open position. We got involved at 21.15, and we are still hanging onto it. We need the market to come down a bit more to make this trade break even or profitable. We are down just above 1%.

    Good Investing!

  10. David Ristau
    May 24th, 2010 at 1:21 pm | PermalinkIgnore this user

    Oxen Alert – Long Play of the Week

    Play of the Week: Big Lots Inc.

    Last Friday, I published a long term investing analysis on Big Lots for a 5-year investment. While I think that the stock is overvalued for a five-year outlook, this week appears to be a great week to pickup the stock for a 4-6% gain. Big Lots is slated to report its earnings on Thursday, and expectations are that the company will hit 0.66 EPS with a revenue of 1.23 billion, which would be an 8% increase from last year. With the times tough, Big Lots is a closeout retailer that offers discounted prices on items that are not typically low-end. The company has done very well since the recession began, and they appear destined for another good quarterly report. With the company currently undervalued and the buzz going into reports looming, BIG appears ready to make a move.

    For one, the company has already reported that, for Q1, they saw the expected 8% rise in sales and 6% rise in same-store sales. With the sales in line with expectations, I am less excited about a large earnings beat over the market attractiveness of the stock. Retail has a tough time making huge surprises on earnings due to the fact that sales are reported so frequently. What investors like to see, though, is growth and potential. That is what BIG is offering to investors. 8% growth year-over-year in sales and the potential for much more returns. The company guided that they thought Q1 sales would be in the 4-6% range, and it is great to see it at the top line of their guidance. 

    The company itself has completely turned itself around led by CEO Steve Fishman. They have adopted a new supply chain that is more efficient and produces better inventory turnover and cheaper inventory. The company also, in the recession real estate market, has moved into A-level real estate, which is real estate with the most wealthy surrounding real estate and consumers. Big Lots never has had such locations, and this movement is helping to give the brand even greater market share and brand name. Further, the future prospects of the company are fantastic as they continue to expand and grow with more stores and free cash flow.

    When the company grew revenue by only 7% last quarter, the company made a 33% increase in profits. One year ago, the company made 0.44 EPS, so an increase in the 38% – 42% range would make sense. That would put profits for the company in the range of 0.60 – 0.65. Again the EPS should be close to in line, and investors I am sure are looking at growth potential. The company announced last quarter that they would be adding 80 stores this year. Information on that plus future growth should be good.

    All this positive news gives me a lot of reason to believe that BIG has a lot of potential. The company has no direct competitor with the same business model, but discount stores from dollar to Walmart to wholesale all provide competition. The great thing there is that 7/8 of these types of companies beat earnings estimates in the past month and a half. 

    Things are looking very good for this industry as it continues to grow among the recession era and as individuals extend their cash.

    Entry: We want to get involved in the range of 36.50 – 36.60.

    Exit: We are looking for 4-6% gain up until Thursday morning.

    Good Investing,

    David Ristau

  11. David Ristau
    May 24th, 2010 at 3:36 pm | PermalinkIgnore this user

    Oxen Alert – Position Update

     

    PHM – We made 3% on this one. We got in this morning at 10.70, and we exited at 11.04 for a 4% gain. 

    SKF – We got involved at 21.15, and we got stopped out for a 3% loss at 21.80. 

    BIG – This is our Play of the Week that we got involved with at 36.50. We are looking for a 4-6% gain. 

     

    Thanks and Good Investing!

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