Daily Gains Letter

Strong Jobs Market to Benefit Housing and Retail? How to Profit

By for Daily Gains Letter |

Strong Jobs Market to Benefit Housing and RetailWe received great news last week after the reporting of strong jobs numbers in December that capped off a good year in which the country created more than 2.5 million jobs. In December, 252,000 new jobs were created, driving the unemployment rate down to a pre-recession low of 5.6%. The numbers for new jobs created in October and November were also revised higher.

With gross domestic product (GDP) growth at an annualized five percent in the third quarter, there is optimism jobs will continue to be added at the current rate for this year. And as the jobs market improves, the positive action will translate into added confidence for workers and spending. In my view, this will help drive consumer sentiment on cyclical and durable goods.

Moreover, with interest rates and mortgage rates continuing to be relatively low and jobs being created, we have the ingredients for continued strength in the housing market. It’s likely the Federal Reserve will begin to increase interest rates by mid-year, but unless they surge higher (which is very highly unlikely), the rates, by historical standards, will continue to be quite low.

Given this, as an investor looking to profit, you should be looking at sectors that could benefit from the jobs creation and continued low interest rates, namely the homebuilder, home supplies, and retail sectors.

Homebuilders Stocks

The SPDR S&P Homebuilders Index exchange-traded fund (ETF) shows a possible upside break above the 50-day moving average (MA), based on my technical analysis. Just take a look at the chart below.

SPDR Homebuilders Index ETF

Chart courtesy of www.StockCharts.com

The housing market has likely seen its best gains already, but there may still be a buying opportunity in homebuilders and housing-related stocks. Housing starts and building permits continue to be strong in the housing market, with more than one billion annualized units reported in the recent months. This suggests the demand in the housing market remains.

Toll Brothers, Inc. (NYSE/TOL) could be a good play on the housing market. Given the price appreciation, though, I would be looking only on weakness, based on the current downtrend. The company delivered 5,397 units in fiscal 2014, up 29% on a unit basis and 46% based on dollars. The backlog stood at 3,679 units at the end of October, which was flat. Revenues are expected to grow 8.1% in FY15 and 15.8% in FY16, based on Thomson Financial estimates. Toll Brothers has beaten quarterly earnings-per-share (EPS) estimates in four straight quarters.

Home Supplies Stocks

The part of the housing market sector I feel could continue to fare well this year is the home supplies and services stocks. As homeowners continue to renovate, the “Best of Breed” here is The Home Depot, Inc. (NYSE/HD) followed by rival Lowes Companies, Inc. (NYSE/LOW).

For a more aggressive housing market play, investors could consider a small-cap. One company that’s a perfect example of the type of small-cap investors could be watching is Installed Building Products, Inc. (NYSE/IBP). The company is the second-largest insulation installer for the residential new construction market in the U.S. with more than 100 locations. In addition, Installed Building Products supplies the commercial building and existing-home markets. The company also provides garage doors, rain gutters, shower doors, and closet shelving and mirrors. Revenues are estimated to advance 19.2% in 2014, followed by 19.1% in 2015, according to Thomson Financial.

Installed Products Inc

Chart courtesy of www.StockCharts.com

Retail Stocks

The jobs growth will also help drive the retail sector. Of course, you need to be selective. At the top of the retail chain continues to be bellwether Wal-Mart Stores Inc. (NYSE/WMT), the largest retailer in the U.S. and worldwide. A stock like Wal-Mart could be considered as a core holding for conservative portfolios.

Wal Mart Stores Inc

Chart courtesy of www.StockCharts.com

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