Why I Still Like Certain Stocks

By Mark Bern, CFA

The latest Durable Goods Orders report from the Commerce Department shows a spike of 4.5% in August, but that was primarily driven by an increase in orders for aircraft.  When transportation is stripped out orders improved only 0.1%.  Of course, trucks are also putting in a strong showing but autos are actually in decline. 

The takeaway is that Boeing (BA) remains a strong hold in our model portfolio (rated as a buy for new investors) as orders for new aircraft and the backlog of orders continue to pile up making the next several years look like we should see record sales and profits.  The only thing that could dent the current trend would be for China to cancel orders.  But that is unlikely because the main competitor, Airbus (AIR.PA) is behind in fulfilling orders and cannot keep up because of delays by it engine suppliers.  It has fewer orders and is producing fewer airplanes and yet is falling behind on its production commitments and deliveries.  Boeing is struggling to keep up also but appears to be in much better shape.

The point is that there just is not an alternative to Boeing at this point so cancelling orders would simply mean Chinese airlines would receive the planes it needs to continue to meet its expanding demand far later.  That would mean demand would go unmet for several years and growth would slow for those airlines.  That is not the outcome the Chinese government desires.  So I doubt that it will cancel any orders.

New homes sales rose again in August but prices are beginning to stagnant with an increase of just 1.9% over last year.  The Case-Shiller Home Price Index (for existing homes in the largest 20 metropolitan cities) rose 5.9% over last year but, as is always the case, there were huge differences between regions.  In some cities prices rose in low double digits while in other cities the increases were low single digits.  In New York City the average price rose 3.5% over last year but fell 0.5% from the previous month.  

The point is that housing prices increases may be slowing as it is becoming more difficult to afford a home in many areas as interest rates continue to rise while wages are rising slower than home prices.  When average price of homes and interest rates both go up faster than wages (which has been the case for over a year now) there comes a point when too many people can no longer afford or qualify for the payments.  That reduces demand and prices stagnate.  I believe we are either near or at that point in this cycle.

When people can no longer afford to buy a bigger house they tend to fix up or add onto the one they are already in.  That means more sales for home improvement stores like our other portfolio holding, Home Depot (HD). 

Home Depot will also benefit from sales in the Carolinas to repair homes and building flooded or damaged by wind by hurricane Florence.  The full clean up will take years but the majority of the building material sales should occur during the next 12 months.  Home Depot is rated a buy for new investors.

Retail spending in the U.S. is expected to grow by 4.6% this holiday season which will be short of the extremely strong showing last year but still a very good year for retailers.  Internet sales could climb by 15% but that won’t all be going to Amazon.  Many brick and mortar retailers are growing online sales at a faster pace.  Overall, physical stores are expected to experience an increase of 3.5% in sales over last year which is nothing to sneeze at.

As usual, there will be wide disparities between which stores do better than the average and which will do far worse.  Our well-managed portfolio holding, Michael Kors (KORS), is well positioned to be in the upper bracket outperforming its peers and much of the industry.  Its recent announced acquisition plan to buy Versace, an underperforming luxury brand in Europe, has brought the price down to a bargain level in our opinion. 

 I plan to hold KORS for many years as the company has proven its ability to integrate new brand acquisitions, capture savings and leverage sales of new products to its loyal customers.  In this acquisition there also comes the opportunity to expand and strengthen its reach geographically.  We have it rated as a strong buy at current levels.

The portfolios I discussed in an earlier letter are all set up so investors can invest in them with a minimum account of $100,000.  If interested please reply to this email and I will send a link where you can sign up online.