Two New Major Trends

 

Two New Major Trends

A Golden Polaris?

Rent, Don't Buy

A couple of times a year, I like to let my hair down a bit with my Wealth Advisories and write about something that's investment-related, but not necessarily growth stock-related.

Last year on April 11, I went on record saying that the secular (read: multi-decade) bear market in Japanese stocks had come to an end, while the multi-year uptrend in gold prices was over.

I still feel pretty good about both of those forecasts, though I wouldn't say I've been proven right. Japanese stocks (whether you measure it via the Nikkei or the two most popular Japanese exchange traded funds, symbols DXJ and EWJ) had an unreal move from November 2012 to May of 2013, with the market nearly doubling. Imagine!

But since then, Japanese stocks have basically been building bases-they're near the top of the year-long range, and the odds favor higher prices over time, but I'd like to see the Nikkei push back above 16,000 to tell me last year's six-month upmove wasn't just a one-time thing.

As for gold ... well, it certainly was in a bear market at the time, and soon after my write-up, prices plunged another $200 per ounce in just two weeks! However, this is one prediction I'm going to take back today-it's now looking more and more like gold prices have bottomed out.

But my long-term forecast pertains not to gold itself, but to gold stocks.

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Shown below is a three-year chart of the SPDR Gold Trust Shares (GLD), which basically tracks the price of gold bullion. (Add a zero to its price and you pretty much have the current gold price.) The price has generally headed from the top left of the chart to the bottom right-a downtrend-during this time. But notice the action since last June: GLD double bottomed at 115, then etched a higher low at 120 in early June.

That's a year of bottoming action, and the recent upmove to nearly 130 makes it look like the trend could be turning up.

But, as I wrote above, I'm more intrigued with the action of gold stocks-specifically, the Market Vectors Gold Miners Fund (GDX)-which have underperformed the yellow metal for what seems like forever. The bear market in GDX was far more dramatic; GDX fell a whopping 70% from its peak in 2011 to its low, compared to "only" 38% for the GLD.

That decline has removed gold stocks from nearly everyone's radar screen, and the still-huge volatility (GDX is still swinging 3% or more on most days) is keeping them away. But when I step back and look at the chart, I see a major, year-long bottom that could easily lead to many months of upside from here.

Looking at the very, very long-term, I am still leaning toward the opinion that the great gold bull market that peaked in 2011 is likely over-after a decade of rising prices followed by a decisive top, historical studies tell me the top is likely in.

But for the next few months or longer, I wouldn't be surprised if gold does very well, and if gold stocks did even better, possibly with the GDX rising to the 35-to-45 range (again, over many months) should the advance gather steam. Conversely, if the GDX sinks back below 22, I would have to conclude the bottoming thesis is wrong.

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I'm a growth investor at heart, so the next idea really gets me excited, and part of the reason is that I'm not talking about a broad industry group. In my experience, some of the best stock picks tend to come from entirely new industries-think satellite radio, robotic surgery, single-serve coffee brewers and even the iPad, which was an entirely new type of computer.

The trend I'm talking about isn't necessarily changing the way we work and live, but I do believe it, for better or worse, it's the way of the future.

I'm talking about the trend toward renting houses instead of buying. And these aren't vacation rentals or houses around a college campus (I still remember my $210 per month rent junior and senior year!), but nice, newer houses smack dab in the middle of solid communities.

Whereas 15 years ago, all the talk was about the growing share of Americans owning their own homes, two stock market crashes and the real estate debacle have kicked off what looks like a new trend-adults and families renting for years and years while they build up enough savings to plop down on a house of their own.

I see two companies (technically REITs) that seem to be leading the space-one is the appropriately named American Homes 4 Rent (AMH) and the other is Altisource Residential (RESI), a cousin stock to our old friend Ocwen Financial.

Basically, both of these firms actually go out and buy tranches of mortgage debt that's usually delinquent in some sense. They generally try to get borrowers current on their loans, but if that fails (and it often does), these firms are happy to take the houses! Then they renovate them and rent them out. It's literally like being a landlord, but with a national focus and deep pockets.

These are not slummy places we're generally talking about-yes, there will always be demand for lower-quality homes, but the "new" demand, the trend that's taking hold, is the married couple with one child that doesn't have the money or credit score to buy a $350,000 house. So, instead, they rent, paying $1,500 per month for a few years while they sock their savings away. (I also wonder if more travel and job insecurity is leading to more rentals, but I digress.)

American Homes looks like the leader; at the end of April, the firm had 21,973 homes leased, with another 4,000 or so owned but not leased. But many of those are under renovation-of the houses that have been on the market for at least 90 days, the occupancy rate is a whopping 95%. And the company remains busy on the acquisition front, most recently buying up Beazer Homes' rental division, adding 1,300 homes to its tally.

Sales and cash flow growth have been big in recent quarters, and the stock pays a modest dividend just north of 1% annually.

Altisource Residential is smaller but growing quickly-at the end of the first quarter the firm had just 100 homes in their rental portfolio (including those rented, listed for rent or under renovation), but expects that to jump to 1,000 by year-end.

Altisource is also more focused on the financing side of the equation; successfully resolving many of the loans it buys via short sales, modifications or reinstatements. This approach has led to rapid growth, and the firm has been paying a rising dividend for a few quarters (totaling 45 cents per share last quarter, for a potential forward yield of 6.8% or so, though that figure could fluctuate).

I'm not actively recommending these stocks for a couple of reasons. In AMH's case, it's too thinly traded and the stock really isn't outperforming the market to any great degree. And RESI, which is also thinly traded, has done even worse, getting knocked upside the head when it failed in an auction to acquire any much-sought-after loans.

But this isn't about what's going to happen over the next week or month; I think a mega-trend toward renting is underway, and could boost these or other stocks that emerge in the industry in the years ahead. If nothing else, put the idea on a sticky note and see if AMH and RESI develop strength in the quarters ahead.

Sincerely,

Michael Cintolo
Chief Analyst, Cabot Market Letter
And Cabot Top Ten Trader

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