January 22-26, 2024

Tactical Signal 9

The stock market momentum keeps on rolling all week long. University of Michigan’s higher-than-expected consumer sentiment reading on improving economic conditions is indicative of our technical indicators to remain currently in full position (100%).

In a resounding display of strength, the technological surge that catalyzed the markets throughout 2023 propelled the S&P 500 to unprecedented heights, culminating in a record close at 4,839.81 last Friday. Notably, the stellar performances of Goldman Sachs and Morgan Stanley underscored the strength of financial services stocks. Yet, the semiconductor industry, spearheaded by Taiwan Semiconductor, was pivotal in elevating the entire technology sector. The forward guidance from Taiwan Semiconductor, projecting a remarkable 20% estimate in top-line revenue growth for 2024, is a promising indicator of a robust technology recovery. The surge in technology stocks, surging by +4.12% last week, was instrumental in steering the S&P 500 to a commendable +1.19% overall increase. The semiconductor sector, mirrored by the iShares Semiconductor ETF (SOXX), experienced a robust gain of +7.87%, fueled notably by AMD's impressive ascent of 18.88% and NVIDIA's commendable +8.74% gain.

On a different front, investors speculating on a Federal Reserve rate cut have found their bets faltering. Despite certain segments of the economy, such as housing, exhibiting signs of deceleration, consumer sentiment remains resilient. December witnessed a notable uptick in Retail Sales by 0.60%, while Industrial Production demonstrated a commendable year-on-year increase of 0.98%, resulting in a substantial spike in Treasury yields. The 10-year, 20-year, and 30-year yields climbed to 4.15%, 4.47%, and 4.36%, respectively, exceeding last year's year-end figures.

The upcoming week promises to shine a spotlight beyond the financial sector with earnings reports from industry giants, including United Airlines, Johnson & Johnson, Netflix, Tesla, AT&T, Visa, and American Express. As anticipation builds for the first Federal Reserve meeting scheduled for Jan. 30, the market will focus on validating the trajectory toward a ''soft landing.'' Key economic indicators, including GDP, Durable Goods, and Personal Spending releases, are poised to offer critical insights into the ongoing economic narrative.

"In the world of computer science, the majority of everything that was ever invented was invented in universities. To not have this [A.I.] in a form that people can play around with, and take a hundred different approaches to play around with it. That, we have to find some fix that to let universities to be pushing these things, and looking inside these things."

— Bill Gates, Podcast Unconfuse Me with Bill Gates – Episode 5, Nov. 16, 2023.

U.S. Housing Wave - Richmond American Homes to be acquired by Japanese.

Market Share Highlights

In 2023, homebuilders not only survived a cruel interest rate environment, but their past experience through the GFC has even given them the ability to thrive. Homebuilders were affected by the rise in mortgage rates, with home sales down another 19% in 2023, following an 18% decline in 2022. However, the median home sale price has hit all-time highs of $389,800 nationally.

Surprisingly, this led to an average increase in the largest housing stocks, rising almost 100% in 2023. Even now, the future forecast might continue to look good for housing stocks as the FED has signaled rate relief and even potential rate cuts in 2024.

Late this week was proof that there is continued optimism for U.S. homebuilders; in this case, Denver-based Richmond American Homes (MDC – MDC Holdings) was the target of this optimism. It was announced that global Japanese homebuilder Sekisui House Ltd would acquire MDC Holdings for a $4.9 billion all-cash deal. MDC was launched in 1972 and generated $107.3 million in income in the third quarter, making it one of Colorado's largest public companies. After the transaction, the combined firms would be the 5th largest homebuilder in the U.S.

We were excited to hear this as MDC is a holding in Sowell's Flagship small cap portfolio, though a closer look shows that MDC was up 78% in 2023, below the average of their peers. That said, the $63 offer was a 19% premium from the previous day's close. 

MDC was a top-ranked name on our model but stuck out to us based on its valuation and outstanding dividend of 5%+.

Even after the buyout offer, MDC boasts a Forward P/E of just over 12x, a Dividend Yield of 3.5%, and an Earnings Yield of 7.7%. It's easy to see why Sekisui took this opportunity to expand their U.S. business with MDC. Much like Nippon Steel buying U.S. Steel recently, Japanese firms may see more growth opportunities here in the U.S., which can surely be said of homebuilding. 

USA ProjectsSekisui has a large footprint of past and current projects across the U.S. and most recently won a Golden Nugget Award for Grand Winner in the Innovative Housing category in 2020. Sekisui was founded in 1960 and has built over 2.5 million homes worldwide, employing 29,000 employees.

Lastly, will we see more consolidation or M&A in the homebuilders? The housing shortage and the continued demand for new and replacement homes make the sector attractive for a while. 

Larger regional builders like MDC can leverage local market dynamics and create cost benefits, and post-GFC, their balance sheets and the lessons of the past have allowed them to improve their balance sheets.


Economic Reports 1.22-1.26
Select Indices as of 1/19/24

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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