It’s a mega earnings day, with some big names, especially on the tech side, rolling out. We’ll also get some housing data, with the state of that market a hot-button topic for investors as mortgage rates keep climbing.
Last week, existing-home sales marked an eight-straight monthly fall, the first such streak since 2007. That’s as a recent UBS survey showed five big U.S. cities featured as overvalued.
Our call of the day from Jeffrey Kolitch, the portfolio manager of the Baron Real Estate Fund
who sees rare bargains among “best in class” related companies thanks to a big pullback for those stocks this year.
So much so, that if the current downturn leads to a recession, real-estate companies will be at a good starting point, Kolitch said in his recent third-quarter shareholder letter. And while he’s wary about the near term, thanks to central-bank hikes and political risks, he’s more optimistic about the two-to-three view.
Over the first nine months of 2022, many real-estate companies have seen 30% to 60% corrections that have factored in low valuation multiples and expectations for slower growth, said Kolitch, adding that their fund is now “chock-full of real-estate stocks that are unsustainably cheap.”
Kolitch is optimistic due to strong business fundamentals and healthy balance sheets he sees for many companies, along with signs of hope for the overall economy — moderating inflation, plentiful jobs, central bank hiking that’s likely mostly done and a China rebound that’s just getting started.
He also notes that they’ve seen no signs of excessive use of leverage and overbuilding that marked the housing bust of 2008. “We always have our attenae up for warning signs in the real-estate sector,” he said.
Onto his “best-in-class” picks, which must meet criteria that includes: ownership of unique and well-located assets in markets with high barriers to entry, strong long-term growth prospects, sector leaders, conservative and liquid balance sheet and solid management.
Looking at real-estate investment trusts (REITs), Kolitch highlights Invitation Homes
the biggest institutional owner of single-family rental homes, focused in neighborhoods with decent schools and employment opportunities. Equity Residential
is another, the biggest U.S. apartment REIT with high-quality units in choice coastal markets.
Among residential-related picks are some familiar names, including home builders Lennar
and Toll Brothers
and home-improvement retailer Lowe’s Companies
who each get the nod for cheap valuations, along with hard-surface flooring specialist Floor & Decor
Among alternative asset managers, Kolitch notes Brookfield Asset Management
is valued at a more than 50% discount to management’s own assessment, while biggie Blackstone
is valued at a “modest premium” to the S&P 500 index despite “far superior long-term growth prospects.”
Earnings are rolling in from some big names. GE
is down on a profit miss, along with Xerox
is up on forecast-beating results, along with UPS
is falling on mixed results.
After the bell, we’ll hear from Microsoft
and Texas Instruments
on the tech front. Elsewhere, Visa
are also in the late lineup.
Canopy Growth said it will create a U.S. holding company and exchangeable share structure
The S&P Case-Shiller home price index revealed a second straight drop — 1.3% — August. The Conference Board’s consumer confidence index is due later.
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How sticky is high inflation? A team of strategists at Deutsche Bank, led by Jim Reid, have taken a look at consumer price inflation from 1920 (where available) onward for 50 developed and emerging market countries, when inflation reaches 8%.
“Looking at this full history, the evidence shows that once inflation spikes above 8%,
median inflation takes around 2 years to even fall beneath 6%, before settling
around that level out to 5 years after the initial 8% shock. This is around 2pp above
the pre-shock median of c. 4%,” said the strategists. U.S. CPI hit 8.5% in March.
As they point out, current consensus expects inflation to be back or even below 3% just two years after that first breach of 8%. While “history never repeats exactly,” when inflation normally breaches these thresholds, history shows it’s fairly sticky, especially in post-1970 periods,” said Reid and the team.
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