Housing, autos and other 2013 winners
Here are the first 4 areas out of 10 that should continue to flourish this year.
Now that we've reviewed the shallowness that characterized market discourse last year, let's move on to the 10 big themes I've observed in 2012, all of which are poised to remain robust well into 2013.
1. The housing resurgence
First, and predominant, is the return of housing as a major driver to the U.S. economy. A lot of different people will give you a lot of different estimates as to how impactful housing is on the U.S. economy. To that I say: If I were an economics professor, I would be all over trying to figure out that correlation. But I am not. I am a stock-picker, and all I care about is what this means to the stocks in the sector -- and, for them, this recovery has been nothing short of amazing.
We had the homebuilders, led by Pulte (PHM) Lennar (LEN) and Toll Brothers (TOL). We had the housing-related retailers -- Home Depot (HD), Williams-Sonoma (WSM), Pier 1 (PIR) and Lowe's (LOW). We had the building-products companies -- Louisiana-Pacific (LPX), Weyerhaeuser (WY), Rayonier (RYN), Plum Creek Timber (PCL), USG (USG) and Owens Corning (OC). We had the suppliers, like Whirlpool (WHR), Newell Rubbermaid (NWL), Masco (MAS) and Mohawk (MHK). All of these will also be helped by the eventual rebuild that must happen in the aftermath of Hurricane Sandy -- which, while not as big as that following Katrina, will help spur the second quarter's gross domestic product growth.
Then you have ancillary plays from new-household formation -- companies like Discovery Communications (DISCA), Time Warner (TWX) and Comcast (CMCSA) -- or from road-building, such as Vulcan Materials (VMC). Finally you have the stealth housing play, Berkshire-Hathaway (BRK.A), which really took off in the fourth quarter because it also participated in the next theme, insurance.
Can this move continue? How many times have we heard that question? How many times has it been answered negatively? How many times have we heard that it is only a matter of time before the Federal Reserve turns off the juice, even though Chairman Ben Bernanke just told you last month that he's going to keep money easy until unemployment reaches 6.5%?
Here's why I am not concerned. During the sector's heyday, homes were being built at a rate of about 1.5 million a year. OK, maybe that's not sustainable. But it dropped to 400,000 a couple of years ago, back to levels of the 1950s, when the U.S. had half as many people as it does today. Talk about unsustainable. That's ridiculous. Of course, the bears told us it didn't matter, given the shadow inventory of homes owned by banks.
But, in about a year's time, a combination of factors ate through that shadow inventory once pricing came back: banks working with underwater lenders, a pro-homeowner Washington and the annual destruction of homes through fire and flood. The rally in the bank stocks tells you fears about the underwater owners will not be realized. Those homes are roaring back in value, too -- and they are still good, affordable buys!
That's especially so given these low rates and high rents. I think that, unless you are in the real estate market, as I am, you have no idea how ridiculously high rents are. It is still quite difficult to get a loan to buy a place. But, as housing goes up in value, you will see the major banks lend again -- just as Bank of America (BAC) CEO Brian Moynihan told you would happen last Friday.
That's why I think we have multiple years -- not one year, but multiple years -- of housing strength ahead of us. This remains the go-to group for 2013, and Washington's debt-ceiling talk will be terrific for opportunities to buy.
2. The insurance comeback
This insurance group performed remarkably well in 2012, be it in Genworth (GNW) or Travelers (TRV) or Hartford (HIG), Allstate (ALL), Berkshire-Hathaway or AIG (AIG).
I think several things are at work here. First, there have been enough catastrophes out there to take out a lot of capacity, and insurance rates are going up. Second, the group's just done nothing for ages, and it is way behind the broad market. Finally, and most important, the asset side has come back to life with a vengeance. These companies owned a ton of miserable, awful housing-related paper -- and, as housing increases in value, this paper's coming back.
To me, AIG is the best way to play it, because this company has pretty much everything that had been negative, but is now good.
3. Ne'er-do-well banks recuperate
A third theme is right there with the insurance companies: the banks. I think people don't understand that this group is so far behind the market that we tend to think that it is never coming back -- at least if you think about the book values.
But something happened in this market in the fourth quarter: The book value started to come to relevance as a measure of worth. If that's the case, you're going to see some remarkable moves in everything from Regions (RF), First Horizon (FHN) and Zions (ZION) to Morgan Stanley (MS) and Goldman Sachs (GS), to Bank of America and Citigroup (C). These are the companies for which the book value had been suspect -- and it may no longer be suspect amid recovery in the kind of paper that is also owned by the insurers.
I know that you could argue I am leaving out the best three -- Wells Fargo (WFC), U.S. Bancorp (USB) and JPMorgan Chase (JPM) -- all of which I like. But the theme here is not "best of breed," which is more of an evergreen concept. The theme is the cyclical recovery of the portfolios of the ne'er-do-well banks. I wouldn't overlook Capitol One (COF), either, because its credit-card business is hot. Also recall its purchase, for very little money, of the ING Direct business from ING Group (ING) -- a business that is humming.
4. Ascending autos
The fourth rising tide? Autos. This group has been tough, because we've been in an American-related renaissance as auto production in the Great Recession has dropped almost 40%. We just can't talk enough about that decline in build, as well, which is almost as shattering as the plunge in housing starts. We just didn't see it in the stocks because the major players, Ford (F) and General Motors (GM), are huge international companies and they were being pulled back by Europe and even China.
In 2013, China stands to be a tailwind and Europe will be cordoned. That means Ford and GM are going to be huge stocks.
They should be terrific -- particularly Ford, which keeps refinancing and refinancing, and just refinanced a gigantic piece of paper last week. No one even notices anymore. They should. They will when the company reports. Meanwhile, GM has bought a big piece of the U.S. government's stake, which is going to set up this stock for a terrific 2013. I would buy both.
The ancillary auto plays make sense here, too -- like Goodyear (GT), Cooper Tire (CTB) and CarMax (KMX). These shares all rise with auto builds, which I think could be up to 16 million this year. The consolidation in rental cars, coupled with destruction from Superstorm Sandy, will mean that Hertz (HTZ) and Avis Budget (CAR) should go still higher as a huge wave of consolidation sweeps over the group.
In part two tomorrow, I'll hash out the last six themes.
Jim Cramer is a co-founder of TheStreet and contributes daily market commentary to the financial news network's sites. Follow his trades for Action Alerts PLUS, which Cramer co-manages as a charitable trust and is long WY, AIG, GS, WFC and SWN.
More from TheStreet.com
"Bank of America Corp is looking to sell collection rights on at least another $100 billion of mortgages in the wake of announcing a sale of $300 billion in mortgage servicing rights on Monday, according to two sources familiar with the situation."
I don't believe the "shadow inventory' numbers are being reported honestly. Housing is not going to fly in 2013.
word in my circle of friends is nano technology is the place to be for a career, if you were just starting out. not sure how that translates to stocks. but from a stable engineering job that's where new grads should try to be now....
BoBo = The best contrarian play on fraud street. Contrarian as in the context of betting against his choices.
Cramer, as usual you are way off base. The home values today have a third of the owners under water with their mortgage and another third below the value they paid for their home. So, the remaining third represents the home market. Likely they are people who are slightly better off and if motivated would want to trade up. However, they just got clobbered by your buddy Obama, with unaffordable health taxes, tax increases on income, and policy restricitions on deductions. So Mr. Wizard tell me what will motivate people to buy with a limited selection and earning power in disarray.
Fast food - The casual dining places like Red Lobster and Applebee's continue to lose business to fast food, I like YUM for the diversity, along with PNRA.
Household products - consumers still show lots of loyalty to solid name brands like Kleenex, Colgate, Tide, Pine Sol, Suave, etc.. Companies like JNJ will continue to do well. Things would have to get pretty bad for us to make the switch to generic toilet paper or laundry detergent.
Discount stores - Sales will continue to increase at the lower-end retailers, DG continues to be a good play, along with KSS and TJX. As incomes remain stagnant while prices rise, fewer people will be shopping at Whole Foods and Bloomingdale's.
Auto parts - Cash 4 Crappers happened a few years ago and those that bought new cars then will start needing more repairs this year, even if it's just wiper blades, brakes, etc... Autozone and Advance Auto should do well.
Garden supplies - there's a huge boom happening with people who are serious about growing and/or raising their own food, products like Miracle Gro, tools, tillers, top soil, hoses, fencing, chicken feeders, etc... should do well in the coming year, along with Lowe's and Home Depot who sell a ton of this stuff.
Take Kosmo's side on this....Being in three of his sector's choices.....I better believe.
Outside of Tobacco, Home Improvments are our best performers...
And see what springs brings...In the Auto sector..
Plus REITS are a "perfect place" to park extra cash for the time being.
CEO.....Yes you are absolutely correct, Don't think Nardelli has had a good track record anyplace he's been the past couple companies(chrysler ?? too) Maybe he was living on Past Laurels ?
Home Depot's been a sucess story for us, also better then Lowes. HD a doubler+ since buying.
Just wish I had put more in when taking that chance, pricey now..
And I would like to see a little increase in the dividend, I think they can afford it ??
STEVE.......Most good managers can make all the difference in the world with any operation; As ExCeo pointed out....Happy Companies usually do better, the employees are more loyal and have a tendancy to become "stakeholders" in the sucess of the business....Longer tenure and benefits...And more production and profits for the Corporation.
"Job One is our Goal" or "Progress is our most important Product" are not just catchy phrases; They become a way of life at well run places and it shows...
Makes little difference if they are Union or non-Union(people seem to get confused about that)...
Good Companies are good Companies, and the Management along with the Workers, make it that way...
Steve....Keeping with the Good Management theme on well run Companies....Sometimes it's the Founders or the Founder's family....That control the reins of the business...The better ones consider the Company as one of their children(in a sense they are) and they consider the employees as Grandchildren....If the Company does well, usually everyone shares in the Bounty.
Big or small, if they have good fundamentals, revenues/sales, earnings/profits, and dividends, particularily increasements in all the above for 5-10 years...It's a pretty good bet..
Many of them have good benefit plans along with profit sharing...These are pretty good bets.
ExCeo mentioned Mutual Fund managers also:
Same type of numbers, along with a fairly long Tenure( over 5 years) and a great performance are usually the ones to give a second or third look at.....Don't be sucked in by a flash in the pan performance that may only last 1-2 years..
I'm not a Mutual Fund type guy anymore, but there are some pretty good Funds, maybe even ETFs out in the Marketplace...The difference in my case...Is I have the time to do the footwork.
They may be Kids, but man can some play pigskin....The Coaches are second to none...
And a few, "very few" of these kids are the ones that go on to get million or multi-million dollar contracts....
Kelly at Notre Dame has built his resume up with National Championships at GVSU in Michigan and a stint at CMU and a MAC Championship, on to the Cincinnatti Bear Cats with another East(?) championship....Then going to the "big rumble" with Notre Dame against Bama, somewhat impressive.
And a shot at a "Fighting Irish" First National Championship.
And Nick Sabin....Is Nick Sabin, with "the Tide"
On a lighter note....Herding Cats; The first time I saw that commercial on TV, I fell out of my chair.
But my wife is a Cat Lady, they are all outside now...And when she takes the feed buckets to the "Cat Shed" it looks like the round-up, about 20 of them running ahead of her and a few skirmishes, it is interesting and funny to watch.....She is their Hero...And many of them were "drops" here in the Country....Or kittens of.....THEY CAN BE "HERDED".
NTU....Some Companies have enough sense to start bringing back those call centers and servicing on-shore activities...Some never will, along with outsourcing engineering or IT services..
I don't like calling an 800 number and being transferred 2-3 times, to end up with some broken-English guy named Jonnie, that doesn't know where Notre Dame is at, in South Bend, Indiana.
Speaking to that, too bad for the "Fighting Irish" in a terrible game against 'Bama, but the "RollTide" is what they are and this year it was all about THEM.
Those are all pretty good picks...Brutus.
I've wanted to go with YUM for some time, but then it became pricey like Mickey Ds.
YUM has got a very big footprint in China, which makes it tastier...
But a recent "chicken scare" has clipped their wings so to speak on KFC's performance.
But I'm still interested..
I have Dollar type stores on the watchlist also...To add a little more to our retail sector...
But recently reading some downturns in their ranks, maybe over expansion? And another factor that if the recovery strengthens, shoppers have a tendancy to move back to likes of Targets or others.
Many of your others are Stalwarts.
Looks like the Markets will take care of themselves today...Waiting on Earnings...
But noticeable is some "profit taking" in several sectors...
I have to get my azz busy and do some work...
Miss Lilly has got a few chores for me...
Steve if I understood "nano technology" better, it would probably entice me, but I have to leave that to and trust the high-tech guys and companies that do...
It still reminds me of something from "StarTrek"...But, then we all should remember their "Communicators" along with Photon Torpedoes and Space, Laser Blasts.?
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