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Toll Brothers, RE/MAX Holdings, JPMorgan, Citigroup and Capital One highlighted as Zacks Bull and Bear of the Day

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·12 min read
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  • TOL
  • RMAX
  • ^GSPC
  • COF-PJ

For Immediate Release

Chicago, IL – June 28, 2021 – Zacks Equity Research Shares of Toll Brothers, Inc. TOL as the Bull of the Day, RE/MAX Holdings, Inc. RMAX as the Bear of the Day. In addition, Zacks Equity Research provides analysis on JPMorgan Chase & Co. JPM, Citigroup Inc. C and Capital One Financial Corporation COF.

Here is a synopsis of all five stocks:

Bull of the Day:

Over the past 16 months, we’ve seen an increase in the price of all sorts of commodities – but none of them have stoked the fears of inflation like the steep uptick in the price of lumber.

Though it’s only one of many components that make up the total cost of producing new residential housing units, lumber has an outsized influence on the public perception of the cost of housing. Over the past year, the additional expense of a newly constructed home that’s attributable to the cost of lumber raw materials has been estimated at between $12,000 and $36,000.

The St. Louis Fed’s Bureau of Economic Research estimated that the median sales price for a new home in April of 2021 was $372,400, just shy of the all-time high of $373,200 set in January. The increase in the cost of lumber is certainly responsible for a portion of the recent increase in housing values, but it’s far from the whole story.

The prices of the Random Length Lumber futures contracts at the CME nearly tripled early in 2021, but have since declined more than 50% from those highs. While unexpected demand was largely responsible for the rapid rise, logging companies and sawmill operators were able to rapidly increase production, providing the market with a flood of the raw materials for residential construction.

Low interest rates, shifting demographics and a general trend toward ownership of spaces in which people can both live and work have sent the prices of both new and existing homes to all-time highs. The pace of existing home sales has been sliding over the past several months as high selling prices deter buyers, but those prices remain as firm as ever.

All of those factors are lining up in favor of the nation’s largest home-building companies. Industry analysts estimate that the US is short 2-4 million homes from "full" supply. Thanks to a combination of market pricing power and declining materials costs, earnings estimates are soaring.

The homebuilding stocks typically trade at lower Price to Earnings multiples than the broad markets, but recent upward revisions have made them uncharacteristically cheap.

Even after a great start to 2021 in terms of share price, these stocks are still a legitimate value opportunity – and you can even earn some income - Toll Brothers, Lennar and Pulte each pay a dividend yield of 1% or more annually. That may not sound all that juicy, but with the 10-year US Treasury Notes yielding less than 1.5%, a 1% dividend in a stock with growth potential is an excellent bonus.

Toll Brothers in particular has seen big increases in earnings estimates extending all the way through 2022 – and earning the company a Zacks Rank #1 (Strong Buy).

In business – and the business of investing – there are rare occasions when all the stars are aligned for a certain company or industry and all you have to do is recognize the opportunity and make the buy.

Right now, all signs point to a year or more of good times for the homebuilders, and Toll Brothers is the strongest among a strong bunch of candidates.

Bear of the Day:

Today’s Bull of the Day is a homebuilder that’s in a position to capitalize on recent price trends in the residential construction and sales industry. Enjoying costs that are on the way down and sales prices that continue to rise, Toll Brothers is creating the housing products that are most in demand right now.

The same trends that have been so positive for home builders aren’t necessarily good for all real estate market participants. Businesses that deal in transactions in existing homes are facing a unique set of challenges that are likely to keep a lid on revenues and profits for the next year or more.

The federally-sponsored lending institution Fannie Mae estimates that 5.93 million existing homes will change hands in 2021, and that only 5.6 million such transactions will occur in 2022 – a 5.5% decline. The National Association of Realtors is a bit more optimistic – anticipating 6.22 million sales this year, and only a slight decline to 6.2 million next year.

Re/Max Holdings is in the transactions business, franchising real estate offices and support services to realtors and also offering mortgage lending services through its Motto Mortgage subsidiary. The revenue model is fairly simple, agents and brokers typically earn a percentage of total transaction value.

If prices are up, their cut of the deal grows. But if rising prices and other demographic factors reduce the number of properties available for sale, total revenues are likely to stagnate or even decline.

The number of active real estate listings in the US had already been declining slowly in the years leading up to the start of the Covid-19 pandemic, but really fell off a cliff at the beginning of 2020. Thanks to the low supply of homes on the market, stories abound of hopeful buyers engaging in bidding wars and snatching up new listings sight-unseen. From the perspective of realtors however, the dearth in listings is a big problem.

(If you haven’t done it in a while, look up your neighborhood on Zillow.com. There’s a good chance you’ll see a lot fewer of those “for sale” red circles than you did a year or two ago.)

The mortgage business is facing similar challenges. After years of rock-bottom rates that appealed to both new home shoppers and customers who could generate payment savings by refinancing existing properties, the Mortgage Bankers Association is forecasting a rise in the rate on a 30-year fixed mortgage and a steep decline in the notional value of loan originations.

The MBA has forecast that the average rate on a 30-year fixed rate loan will rise from 2.8% in 2020 to an average of 3.7% in 2021 and to 4.4% in 2022. That translates to an expected drop off in refinance activity from $2.4 trillion in 2020 all the way to $573 billion in 2022. The expected increase in new purchase financing from $1.4 trillion to $1.7 trillion would make up less than 20% of that shortfall.

If rates rise – as nearly every market observer expects – things could get very tight in the mortgage industry.

The last quarterly report from Re/Max contained a disappointing earnings miss. Though the $0.46/share in net earnings wasn’t too far below the Zacks Consensus Estimate of $0.49/share, the fact that it was a miss at all in one of the hottest real estate markets ever was concerning.

For investors, it would be a better idea to focus on the companies – like the builders – who are in a position to capitalize on the rise in demand by adding new supply, rather than those who are dependent on transactional income that may never materialize.

Additional content:

Fed Gives Nod to Banks' Dividend Hikes and Buybacks: What's Next?

As expected, major banks have cleared 2021 stress tests conducted by the Federal Reserve. Hence, additional restrictions on dividend hikes and share repurchases that were in place since last year due to the uncertainty over the impact of the coronavirus pandemic will cease to be effective from this month end.

The central bank noted that banks “continue to have strong capital levels” and can withstand “severe recession.” The vice chair for Supervision Randal K. Quarles, said, “Over the past year, the Federal Reserve has run three stress tests with several different hypothetical recessions and all have confirmed that the banking system is strongly positioned to support the ongoing recovery.”

Thus, major banks including JPMorgan and Citigroup will no longer face any restrictions on their capital distributions.

While all the COVID-19 era restrictions are being removed, banks are still subject to the normal restrictions of the Fed’s stress capital buffer (SCB) framework. The SCB framework, finalized last year, requires banks to maintain sufficient capital to “survive a severe recession.” In case a bank fails to maintain this, it will face limitations on capital distributions and discretionary bonus payments.

Detailed Analysis of 2021 Stress Test Outcome

This year’s hypothetical scenarios for stress test included Baseline and Severely Adverse, and covered 13 quarters through the first quarter of 2024. The toughest scenario was characterized by severe global recession, along with heightened stress in commercial real estate (CRE) and corporate debt markets.

The unemployment rate would increase to 10.75% by the third quarter of 2022. Further, real GDP in that same time frame would fall 4%, with equity prices plunging 55%. Additionally, severe recessions in the eurozone, the U.K., and Japan, and a significant slowdown in “developing Asia” were part of this hypothetical scenario.

Under this scenario, all 23 participating banks would incur $474 billion losses (in aggregate), with roughly $160 billion losses from CRE and corporate loans. Yet, banks’ common equity tier 1 (CET1) ratio would decline to 10.6%, which is still more than twice the minimum requirement of 4.5%.

Of all banks, HSBC Holdings’ American operations’ CET1 ratio fell to the lowest level, dipping to 7.3%, while Deutsche Bank's U.S. operations recorded the highest CET1 ratio of 23.2%.

Big Rewards Awaiting Bank Investors

In 2020, banks faced real-life economic shocks following the coronavirus pandemic, which by many measures were more extreme than the Fed’s hypothetical scenarios. Despite this, banks were able to clear two rounds of stress tests (June and December).

Nevertheless, in June 2020, the central bank put limits on banks’ capital distribution (maintaining dividend payouts and suspending repurchases) so that it did not exceed their recent profits. This was done to preserve liquidity owing to the economic uncertainty. So, a few banks like Capital One had to cut quarterly dividends.

Though some of the limitations were removed following the December 2020 stress test by allowing banks to resume buybacks, restrictions on dividends remained in place.

Because of the restrictions last year, many banks have piled up huge levels of capital. Now that banks are free from these limits, they will come up with substantially large plans. Notably, analysts have been expecting banks to reward shareholders with payouts worth more than $100 billion in the next four quarters.

Further, so far this year, the KBW Nasdaq Bank Index has rallied more than 29%. The sharp rise in bank stocks seems to be partly driven by expectations that major banks will easily pass the 2021 stress test and dole out huge payouts to shareholders.

Banks are likely to rally once they start revealing their plans. As the Fed has asked banks not to do so before 4:30 p.m. ET on Monday, Jun 28, we will have to wait a few more days.

Infrastructure Stock Boom to Sweep America

A massive push to rebuild the crumbling U.S. infrastructure will soon be underway. It’s bipartisan, urgent, and inevitable. Trillions will be spent. Fortunes will be made.

The only question is “Will you get into the right stocks early when their growth potential is greatest?”

Zacks has released a Special Report to help you do just that, and today it’s free. Discover 7 special companies that look to gain the most from construction and repair to roads, bridges, and buildings, plus cargo hauling and energy transformation on an almost unimaginable scale.

Download FREE: How to Profit from Trillions on Spending for Infrastructure >>

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