May 22-26, 2023

Apart from the global macro headlines and Washington gridlock, the S&P 500, through all the volatility, pushed through a YTD gain of 9.91% thus far. Sowell’s technical signals are based on a study of momentum, moving averages, and the fundamental signals bottomed, turning the tactical model to positive, aka full position (100%). Sowell’s tactical signal has been out of the full position since January 2022.

Fed Chair Jerome Powell defended the Fed's interest rate action last Friday. To be considered by many as belated, an understanding of the relationship between labor market slack and inflation remains fundamentally intact. Powell also indicated last Friday at the Thomas Laubach Research Conference that developments in the banking sector could mean that interest rates won't have to be as high to achieve the Fed's inflation goals. The Fed's change in tone, combined with better-than-expected and positive industrial production of 0.5%, a closely followed key economic measure by Sowell, led the S&P 500 to gain 1.71% for the week. S&P 500 gains for the week were led by Financial Services, Industrials, and Technology sectors, gaining 2.36%, 1.24%, and 4.59%, respectively. This, in turn, led to bond yields rising across all maturities, and with the inverse relationship, bond returns fell 1.37%, as expected.

Whether the Fed's change in a hawkish narrative means a pause in interest rates remains to be seen, but it indicates that they are closer to the restrictive policy stance than before. The week ahead will continue to seek validation from the economic reports of GDP, Durable Goods, and Housing reports that the U.S. economy has softened, tightened, and yet leveled to achieve the price stability the Fed seeks. As the height of quarterly corporate earnings comes to a close, market leaders, including Costco, NVIDIA, Medtronic, and Toll Brothers, report. Last but not least, Washington will continue to focus on resolving Washington's debt over raising the ceiling debate as talks stalled again last week.

"When you get to my age, you'll really measure your success in life by how many of the people you want to have love you actually do love you. That's the ultimate test of how you have lived your life. The more you give love away, the more you get." – Warren Buffet, The Snowball: Warren Buffett and the Business of Life, October 2009.

One person's peak is another's trough.

Or, in Builders FirstSource's case, when one door closes, another window opens. Builders FirstSource is the largest building supply company in the U.S., headquartered in Dallas, Texas. It serves professional home builders, subcontractors, and large and small remodelers. With the prospect of reaching the peak in mortgage rates, the housing market may have seen the bottom. Equally important is that mortgage rates are still very much in line with the longer history, and with a recession along the horizon, it's not too much to expect even lower rates from here.

Several weeks ago, Builders FirstSource (BLDR) reported 1Q23 earnings results that might be the start of the turnaround for the sector. Despite a decrease in sales of 31.6% to $3.9 billion, gross profit margin increased by 300 basis points to 35.3%. This result reflects the decline in housing sales during the challenging rate environment but with the FED looking to take a wait-and-see attitude on further rate hikes. The worst might be over for BLDR.

Other fundamentals look quite good beyond rising housing sales and demand. Their "value-added" products are 56% of net sales, which includes manufactured products and windows, doors, and millwork. While lumber prices are at a near-term low of $384/mbf, but can be seen higher going forward as housing demand picks up. Currently, BLDR sells at a forward P/E of 16x with growth estimates of 18%. 

BLDR has used the 2022 downturn to make value-enhancing acquisitions while continuing a $1 billion share repurchase program. Lastly, 1Q 2023 free cash flow at $554 million and a net leverage ratio of 0.8x, providing the firm with financial stability and flexibility. Peak-to-peak price performance over the last year BLDR is up 46%, with maybe the worst behind it.


Advisory services offered through Sowell Management, a Registered Investment Advisor. The views expressed represent the opinion of Sowell Management. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and non-proprietary sources that have not been independently verified for accuracy or completeness. While Sowell Management believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Sowell Management’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. Investing in securities involves risks, including the potential loss of principal. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations. Past performance is not indicative of future results.


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