According to the financial media talking heads, the sky is falling because key interest rates are falling. But that’s just not the case. Yes, rates have continued to collapse around the world, as China devalued its currency and the pound and euro are weak ahead of the October Brexit. So, money is still sloshing around and finding its way to the U.S.
The truth of the matter is that we remain in a very positive environment for stocks right now, as the U.S. remains the oasis around the world.
Now, the falling interest rates are affecting all corners of the stock market, so, today, we’re going to take a look at how they’re impacting the housing market – and what’s the right way to play that, as investors.
Home sales have turned up after 18 months of trending lower. This isn’t surprising, as mortgage rates are lower per month when interest rates are lower. So, this helps with housing affordability. Basically, more people can qualify for mortgages based on their income to debt ratio. And the lower the rates, the more homes are going to sell because they’re more affordable.
Every home requires upkeep (if you own a home, then you know exactly what I mean!), and The Home Depot (HD) is the place to go for supplies, whether you’re a contractor or a do-it-yourselfer. And that was very evident in the company’s most-recent quarter.
For the second quarter of fiscal year 2019, HD topped analysts’ estimates. On overall earnings of $3.5 billion for the second-quarter, earnings per share increased 3.9% year-over-year to $3.17, up from $3.05 per share in the same quarter a year ago. The consensus estimate called for earnings of $3.08 per share, so Home Depot posted a 2.9% earnings surprise.
Looking forward, company management expects sales to grow 2.3% year-over-year, which is below current analyst forecasts for 2.8% annual sales growth. The company also reaffirmed its earnings guidance, as it looks for earnings per share of $10.03. That’s up from earnings of $9.89 per share in 2018.
Now, heading into its earnings report, HD had earned a “C” for its Total Grade. However, as you can see below, the stock was upgraded to a “B” post-earnings.
Following the quarterly report, buying pressure increased, boosting the stock to new 52-week highs. In fact, it hit more 52-week highs this week. Clearly, the “smart money” is still very much interested in this stock. That’s also reflected in HD’s strong Quantitative Grade—the most important variable in my stock grading formula. It’s ultimately why I recommended it to my Growth Investor subscribers as a High-Growth stock.
That being said, in this battle of housing stocks, we can’t forget about the homebuilders! Because there’s a rising demand for homes, more are being built, too. There are plenty of folks who are getting older and downsizing, but they want homes with easy upkeep. So, they turn to the new models.
One such company is Dr. Horton, Inc. (DHI), which as a homebuilder seems to be benefiting from the low interest rate environment. After all, at times when a mortgage costs less to obtain for the same house, more people will take the leap.
So, against that landscape, let’s see how THIS particular homebuilder is looking. For the company’s fiscal third-quarter earnings report on July 30, DHI announced earnings of $1.26 per share on 10.6% year-over-year increase to $4.9 billion in revenue. This topped expected earnings of $1.07 per share on $4.5 billion in revenue. So, the company posted a 17.6% earnings surprise and an 8.9% sales surprise.
For a fuller picture, here’s how DHI stacks up in Portfolio Grader.
Both its Fundamental and Quantitative Grades are B-rated, which isn’t surprising given the solid earnings report and recent momentum. On August 22, DHI hit a new 52-week high of $50.64, and the shares traded less than a dollar from that level this past week.
That’s pretty impressive given the market selloff we’ve been facing. While good stocks like HD and DHI can’t entirely avoid market selloffs, they do tend to bounce back quickly and with force. As you can see in the one-month chart below, even at a time when the S&P 500 is down roughly 3%, DHI is UP a good 11.9%, while HD is up a good 4.6%!
Like D.R. Horton, Home Depot just hit new 52-week highs.
While both stocks are B-rated in Portfolio Grader, I believe HD will be the winner over the long term. Over the years, Home Depot has become the world’s biggest home improvement retailer, and it offers over one million products in its more than 2,000 stores across the U.S., Canada and Mexico for DIY shoppers, professional contractors and others.
The good news is that the “smart money” on Wall Street knows this – and is showing a clear preference for “Bulletproof” stocks like this one. They’ve already tipped their cards by pouring their capital in. And the buying pressure that results from this is exactly what my Portfolio Grader system is designed to spot!
There’s Another Factor At Work Here, Too
Having spent time on Wall Street, these big institutional investors quickly learn that you need dividends to grow a portfolio over time, and I think that’s another reason for this clear preference. The income really helps smooth over the rough patches.
Dividend growth stocks are especially important today – when the global bond market is just going haywire. And even the 30-year Treasury can’t be relied upon for good yield anymore. Recently, its yield dropped below 2% for the first time ever!
So – whether you’re managing big institutional cash, or your own portfolio – you’re going to need what I call the Money Magnets.
Not only did these stocks earn an A in my Portfolio Grader, thanks to strong buying pressure and great fundamentals…
The stocks also earn an A in my Dividend Grader. These stocks are able to pay great yields – and have the strong business model to back it up!
All in all, I’ve got 27 strong dividend growth stocks for you, almost all of which yield more than the S&P 500. These stocks are poised to do well as we continue to see international capital flow to the U.S. markets. Click here to see how I found these stocks, and how you can get great performance out of YOUR portfolio – come what may.