Tuesday, October 18, 2005

Ryland Group tops forecasts, raises outlook - Home Construction - Manufacturing - Earnings

Ryland Group tops forecasts, raises outlook - Home Construction - Manufacturing - Earnings

Strong earnings continue to be the norm for 2005. Ryland homes beat estimates by 10 cents per share! This stock has dropped in just a few weeks from the low 80s to the low 60s. Should the price of oil fall more, the homebuilding stocks could be strong performers.

The S&P 500 is now throwing off an earnings yield of almost 7.25%! The public is blindly missing a buying opportunity.

CAL made 80 cents a share while paying out extremely high prices for fuel. The buying opportunity of a life time is in stocks like AMR and CAL. When do you get the chance to buy the best in the business at 80% off?

The market was down today because of the decline in oil stocks. The energy index lead the way down. The S&P sector was down 4.64%! The natural gas index was down 3.8%! The oil services index was down 4.68%! If you do not own oil stocks, this was very good news.

Remember that the see-saw is a common phenomenon in the market. When someone says food stocks were up today, it is important to know if the conversation is about grocery stores or restaurants as these are two of many groups that trade like a see-saw.

High tech did well today. The Nasdaq 100 was down .74% during the day and in after market trading a number of stocks did well. For example, MOT announced excellent results and has traded up about 2% after the market closed.

Ken Fisher made another great point in Forbes. He relates that big cap growth stocks do well startging about a year after a flat yield curve. This idea is consistent with what one would expect about the time the business cycle switches from a consumer led recovery to a business lead expansion.

I will not play the housing sector at this point even though I believe it will retest this summers highs. A friend asked me if I would buy Bank America or Home Depot. Both stocks have attractive valuations but neither excites me. I suggested that WMT is a similar big cap, out of favor play, but in a more defensive area that should do well in a rising interest rate economic expansion.

The last sentence of the above paragraph is a tricky one. With the FOMC pushing up short interest rates and the oil working with the rates to drag the economy down, it is very possible that long-term rates will come down before going up. The problem is that if you buy bonds and the economy remains strong, you would likely lose money during an economic expansion. On the other hand, if you buy stocks and hold for the next few years, you will make money. You may lose for a little while but when the BULL CHARGES you will participate in the great rally to come.

Folks, it is a rare event to have stocks so cheap relative to bonds and real estate. The current down draft may run a little while more but the opportunity is real. The broad averages will likely be up 45% over the next 2 to 3 years. The top performing groups will likely be up close to 100%. The top performing stocks will likely be up over 400%!