For Immediate Release
Chicago, IL – July 15, 2013 – Zacks Equity Research highlights HEICO Corporation (HEI-Free Report) as the Bull of the Day and Agnico Eagle Mines (AEM-Free Report) as the Bear of the Day. In addition, Zacks Equity Research provides analysis on the Lennar (LEN-Free Report), MDC Holdings (MDC-Free Report) and SPDR Homebuilders ETF (XHB-Free Report).
Here is a synopsis of all five stocks:
Remember when the Fiscal Cliff was going to destroy defense-related stocks? That was so 40% ago, as my chart below shows comparing the iShares Dow Jones Aerospace & Defense index ETF vs. the S&P 500 for the past year.
One year ago, Lockheed Martin CEO Robert Stevens told a House committee that deep Pentagon cuts slated to kick in January 2, 2012 would force his firm and others to fire employees and close factories. It was expected that those moves would hinder U.S. national security, erode defense firms' bench of highly skilled workers, and, of course, cut into weapons-makers' bottom lines.
But the blows never came. In fact, with big guns like Boeing, Lockheed Martin and Northrop Grumman, the ITA really took off in the past 5 weeks.
This group has consistently been in the top 20% of the 265 industries ranked by Zacks, since before the election last fall. Given this outperformance, I was drawn to looking at one of the sub-industries of the Aerospace/Defense sector which currently ranks 24th of 265.
HEICO Corporation (HEI-Free Report) is engaged primarily in certain niche segments of the aviation, defense, space and electronics industries. HEICO's customers include a majority of the world's airlines and airmotives as well as numerous defense and space contractors and military agencies worldwide in addition to telecommunications, electronics and medical equipment manufacturers.
I picked HEICO for "Bull of the Day" for two reasons. First, I like their projected earnings and sales growth of 19% and 13% respectively.
I last wrote about Agnico Eagle Mines (AEM-Free Report) as a Zacks #5 Rank Strong Sell on April 2, right before they missed earnings estimates by 35%.
That was also before I decided to short gold above $1450 an ounce in May to take advantage of what I thought was becoming a bear market for the barbarous relic.
Since then, AEM has fallen from $40 a share to as low as $25 in late June when gold fell below $1200. You can access that Bear of the Day report here.
Here's a summary note from Zacks Research on July 4, with a price target of $29:
We are upgrading our recommendation on Agnico-Eagle to Neutral. Profit for the first quarter slid roughly 70% on lower gold prices and production as well as higher cash costs. Adjusted earnings fell well short of the Zacks Consensus Estimate. Revenues fell by double digits, yet beat expectations.
The company backed its production guidance for the full year. Agnico-Eagle maintains a solid exploration budget and is reinvesting in its assets to expand output. Moreover, the company s revised life of mine plan is expected to yield significant free cash flows over the next several years.
However, any potential delay associated with the development projects may jeopardize its future production. We are also concerned about high operating costs across a number of mines.
Will the NAHB Survey Hammer Homebuilders?
Tuesday, the National Association of Home Builders (:NAHB) will release its monthly survey. The survey will provide insight into the impact of higher mortgage rates on builder sentiment and housing activity. According to the Freddie Mac mortgage survey, the 30 year fixed mortgage rate has risen from 3.59% on May 23rd to 4.51% as of July 11th. The rise underscores the potential shock to housing demand. The survey tends to be an underrated indicator, but is a solid leading indicator of home sales and housing starts.
Inventories are lean and supporting home prices:
The main bullish dynamic for home builders is lean inventories. There was a 5.1 month supply of existing homes on the market in May compared to a 9.4 month supply in 2010, and at 2.220 mln units, inventories are back at levels seen in the early 2000’s. The same story is present in the new home space. In May, there were 161,000 new homes for sale which is in record low territory. Inventory levels are supportive to building activity and builder profits. Low inventories have also helped support new home prices and builder margins. New home prices were up 10.3% year over year in May.
Drilling into the details:
The NAHB composite index jumped 8 to 52 in June, but the trade is looking for the July reading to dip just 1 to 51. The outlook seems buoyant given the vicious rise in mortgage rates and surge in the June reading. I am willing to take the under against the consensus. Below the surface, it may be worth monitoring the current sales and traffic flow indices. Current sales may be high as buyers rush to lock mortgage rates, but traffic could fall off if higher rates are discouraging new business. The combination of higher mortgage rates and rising home prices are a headwind to housing demand. The MBA purchase index has eased 8.5% from its May peak, but is within the range seen over the past year. Recent dovish comments from Fed Chairman Bernanke may have been aimed at capping the rise in mortgage rates.
At last check, the Zacks Construction Industry sector was expected to post 46% earnings growth in Q2 2013. The table displays 2013 and 2014 earnings per share and changes over the past 30 days for a select group of homebuilders. Despite the recent rise in mortgage rates, EPS estimates have been biased upward. Lennar (LEN-Free Report) and MDC Holdings (MDC-Free Report) have posted the strongest upward revision in 2013 estimates in the past month. Notice that the homebuilders in the table are either a Zacks Rank #1 (Strong Buy) or Zacks Rank #2 (Buy).
Summing it up:
The NAHB survey could impact the outlook for homebuilder earnings. A firm survey could keep EPS estimates buoyant and support the outlook for continued profit growth by downplaying the recent rise in mortgage rates. However, a soft reading could dampen the favorable trend in upward earnings estimates, and cause the sector to focus more closely on the path of interest rates. Watch to see if EPS estimates move in the days following the NAHB survey.
Technically, the SPDR Homebuilders ETF (XHB-Free Report) has a price gap below current levels at $29.92. This level may be monitored for support by chartists. The $31.65 high from June 18 and $31.78 low from May 16 may be watched for resistance and selling pressure. The ability of the XHB to work through these levels may be an indication of investor sentiment toward the sector.
About the Bull and Bear of the Day
Every day, the analysts at Zacks Equity Research select two stocks that are likely to outperform (Bull) or underperform (Bear) the markets over the next 3-6 months.
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