MONEY Housing Stocks

Smart Ways to Play the Uneven Housing Recovery

Home Depot shopping cart in store aisle
Jim Young—Reuters

While shares of homebuilders remain iffy, there are other attractive stocks in the broader real estate recovery.

The U.S. housing market roared in July, but investors may want to tiptoe rather than jump into the sector.

That’s because much of the 15.7% increase in new home construction in July, the first gain in two months, came from apartment buildings, which tend to attract lower income renters and do not generate as much overall economic activity as single-family homes.

The appeal of apartments to millennials, a generation laden with student loan debt that may make it difficult to afford a down payment on a home, is one reason why some noted investors, such as DoubleLine Capital’s Jeffrey Gundlach, have said they are betting against the shares of homebuilding companies.

Fannie Mae on Monday downgraded its outlook for home sales and construction, estimating that 1.4 million single-family units will be constructed during 2014 and 2015 combined, compared with an earlier forecast of 1.6 million units.

“From an investment standpoint the homebuilder trade has been one of the most hotly anticipated trades over the past few years. Yet it continues to be nothing spectacular,” says James Liu, a global market strategist at J.P. Morgan Funds.

Fund managers, as a whole, are not taking a rosy view of the homebuilding segment. Actively managed U.S. mutual funds, on average, devote just 1.06% of their portfolio to companies such as Toll Brothers TOLL BROTHERS TOL -0.4596% and KB Home KB HOME KBH -1.1664% , according to Lipper. That was unchanged from the end of 2013.

Yet analysts and strategists say there are some attractive pockets of the housing market.

Housing-Related Retail

Phil Orlando, chief equity strategist at Federated Investors, built up positions in select retail stocks throughout the summer in expectation that a slowly improving housing market would help retailers such as Home Depot THE HOME DEPOT INC. HD 1.2516% and apparel and home fashion company TJX TJX TJX -1.4908% , parent of TJ Maxx and HomeGoods.

Both companies should benefit not just from new home construction, which accounts for approximately 8% of the housing market, but from rising home prices, which could spur homeowners to upgrade their appliances or otherwise put more money into their homes, he says.

“I’m very comfortable that when the dust settles we will see a resurgent consumer in the back-to-school season,” he says.

Home Depot on Tuesday reported a higher-than-expected 6.4% increase in same-store sales in the United States and raised its full-year forecast. Shares of the company are up nearly 8% for the year, or nearly one percentage point more than the broad S&P 500 index.

Apartment Buildings

To be sure, some investors have already done very well betting on a 2014 multi-family housing market. Exchange-traded funds focusing on residential real estate investment trusts, which typically hold apartment buildings and other multi-family developments, have been on a tear this year. The iShares Residential Real Estate Capped ETF is up 22.3% year-to-date, while the Vanguard REIT ETF is up 17.6%.

Those gains raise the possibility that shares of the companies in the multi-family sector already reflect the boom in apartment buildings and have little room to run, analysts say.

“The data remains inconclusive and uneven, says Dan Veru, chief investment officer at Palisade Capital, “and that’s the nature of the housing recovery right now.”

MONEY stocks

Stock-Pickers Can’t Keep Up With the Aging Bull Market

Running of the bulls
Simon Greenwood—Getty Images/Lonely Planet Image

The big companies favored by mutual fund managers have substantially underperformed the S&P 500 index this year.

Even fund managers’ best ideas are not working out this year.

In one sign of the poor performance of stock picking by fund managers as the U.S. stock market continues to rally, the largest overweight positions by large-cap fund managers substantially underperformed the broad Standard & Poor’s index over the first half of the year, according to a Goldman Sachs research report.

Those stocks which were the most shunned, meanwhile, posted above-average returns.

Visa, the most overweight position among the 485 large-cap funds included in the Goldman Sachs study, is down 0.4% for the year, while Exxon Mobil, the most underweight, is up 1.1% over the same period.

Overall, well-loved stocks gained 6% on average for the year through June, while the S&P 500 gained 8% over the same time. The most underweight stocks, by comparison, rallied by an average of 10 percent, according to the report.

The underperformance of active fund managers comes at a time when stock pickers were expected to prosper. The aging bull market, which began in 2009, and falling stock market correlations after last year’s big rally were supposed to make 2014 a time when fund managers would be rewarded for picking companies based on their fundamentals.

Yet poor stock selection is one reason why just one in five actively managed large-cap stock funds are beating the S&P 500 for the year so far. Typically, about 40% of managers best the S&P 500 over the same period, said Todd Rosenbluth, director of fund research at S&P CapitalIQ.

“What funds need to do to outperform is find unloved stocks and get in front of it. If they hold the same stocks that other managers are overweighting, then it’s more likely that they are just going to tread water,” Rosenbluth said.

Underweight stocks’ performance this year seems to bear that out. Shares of Goodyear Tire & Rubber, the company with the largest underweighting among consumer discretionary stocks, is up nearly 16% for the year to date, while shares of Essex Property Trust, the most underweight financial company, have rallied 32%.

Other companies with significant underweighting include Apple, PepsiCo, and Ventas, according to the Goldman report.

The lack of a significant market pullback could be another reason for the underperformance, Rosenbluth added. The S&P 500 has not had a pullback of 10%, known as a correction, in three years. That has made it hard for managers who sold during last year’s 30% rally in the S&P 500 to find places to invest their cash, he said.

“Some managers were prudent and sold during the rally, and now they are left wondering what to do,” he said.

MONEY mutual funds

Good Grief! Investors are Betting on a Big Budget Charlie Brown Film

Snoopy and Charlie Brown from Charles Schulz's timeless "Peanuts"
For the first time ever, Snoopy, Charlie Brown and the rest of the gang we know and love from Charles Schulz's timeless "Peanuts" comic strip will be making their big-screen debut -- like they've never been seen before in a CG-animated feature film in 3D. Blue Sky Animation

With a blockbuster Peanuts film set to appear in theaters next year, funds have been buying shares of the company that owns 80% of the rights to the beloved characters.

Can Snoopy, Lucy, and Charlie Brown captivate another generation of Americans?

Wall Street seems to think so.

With a big-budget Peanuts film set to appear in theaters next year, an unusually high number of U.S. mutual funds have been buying shares of Iconix Brand Group ICONIX BRAND GROUP INC ICON -7.0332% , the little-known company that owns 80% of the rights to the characters that first made their way onto newspaper comic pages more than 60 years ago.

The number of new funds owning shares swelled 36% last quarter, according to Morningstar. That is a high number for a small-capitalization stock with a market value of $1.9 billion and a slowing core business.

The stock is up more than 40% over the past 12 months, which is about 15 percentage points better than the broad market.

Few consumers have ever heard of the New York-based company, though they may be familiar with its roster of 35 brands, ranging from mass-market staples like Joe Boxer and Ed Hardy to Cannon linens and Material Girl, the line of apparel and accessories from Madonna and her daughter.

But with many of its U.S. retail partners, such as Target TARGET CORP. TGT -0.9244% , Macy’s MACYS INC M -2.31% and Sears SEARS HOLDINGS CORP. SHLD -0.751% , struggling with falling traffic and weak consumer demand, Iconix is looking elsewhere to expand — such as films.

“With what is happening in America we don’t see large growth there over the next couple of years but we do see stability,” Chief Executive Neil Cole, the brother of fashion designer Kenneth Cole, told analysts after the company reported its quarterly results in April.

PEANUTS BRAND

Should the Peanuts movie prove to be a hit, it could help Iconix double its revenues, which hit $433 million in 2013, Cole told analysts. The company declined to comment for this story.

Already, the brand has paid some dividends: ABC, owned by the Walt Disney Co. THE WALT DISNEY CO. DIS 0.3023% , renewed its long-standing contract to air the popular Peanuts holiday specials 18 months before it came due.

There is no telling how well the movie will be received, of course. For every hit like “The Lego Movie,” which has brought in $256.7 million at the U.S. box office, according to Box Office Mojo, there has been a film like 2013’s “The Lone Ranger,” whose $89 million in U.S. box-office take paled against an estimated cost of $215 million.

Though the percentage that Iconix could reap from next year’s film was not disclosed, the Peanuts brand should command a premium, said Charles Grimes, a Norwalk, Connecticut, attorney who specializes in character licensing and has worked with properties including Archie comics and Disney characters. It would “not be inconceivable” for the company to get an upfront fee of $10 million or more for the theatrical release of the film, plus additional fees once the box office draw topped certain milestones, Grimes said.

Iconix would also likely get between 7% and 14% of film merchandise tie-ins, such as T-shirts or toys, he said.

“Peanuts has a huge growth ahead of it,” said Cliff Greenberg, who manages $5.5 billion in the Baron Small Cap fund and has been buying shares of Iconix on dips in expectations that it will continue to expand its entertainment division.

Chris Terry, an analyst at Dallas-based Hodges Capital, said his firm began buying shares approximately six months ago on expectations that the Peanuts license will pay off.

RISKS AHEAD

There is caution, however, in some quarters.

The lack of clear numbers regarding Peanuts’ contribution gives Steve Marotta, an analyst at C.L. King & Associates who covers the stock, pause.

“The company is a bit of black box,” he said. He estimates that Peanuts is the most important individual brand to the company, followed by Mossimo and Candie’s.

Nevertheless, he has a “buy” rating on the stock.

The shares trade at a price/earnings ratio of 15.3, a full point lower than the 16.7 average among apparel companies.

Eric Beder, an analyst at Brean Capital, said he has a “hold” rating because Iconix has not bought any new brands this year after typically adding two or three annually.

“The company doesn’t usually beat by much and usually never misses,” he said. “But right now it’s a question of finding the right deals and that isn’t happening.”

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