Homebuilders: Catching the Inflection
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We operate within an investment framework at The LongVol that combines thematic investing with our methods of market-timing. What that means in simple terms is that we look at situations where a tailwind might inflect a sector or stock. That can be share buy backs, government policy changes, Central Bank policies etc.
Once we can see that we then apply market-timing. In this post I am going to show you our process for identifying the inflection in homebuilders starting back in the fall of 2022.
Spotting the Inflection with Macro
Back in October we were tracking MBA applications as well as what the Fed was doing and that continued to drop lower into December.
Then you start to look at the Fed and their policy and they showed no signs of tightenting and still have continued to hike here into the time of this post in 2023.
So with some of the things that we want to do here for Core Positions (read what we define that as here) and housing and home builders back in October were still selling off with bad data.
So why then with bad data would we start to look for buys?
Inflections into Bad Data
Now if you read the recent OpenDoor post it was a real estate name that we simply did not like and I also said that in October in that video above.
So why homebuilders and other real estate stocks as a way to express real-estate long?
One, we had so much bad housing data with mortgage applications, interest rates etc. but you still saw housing demand was high with supplies low.
That was, and still is, a big deal. So when you look at that data combined with the ‘bad data’ it looks like it’s a bad deal but the ‘stock market’ and ‘real economy’ are two different things and many investors seem to forget that.
The housing stocks then and now had low PE ratios (we want to see that for Core Positions) and were not in the same situation with lending standards we saw in 2008.
Finally, we go to price. Price action even with that bad data would not budge. It was holding a trading range. Look at many other stocks/sectors and what happens when bad news or data comes out?.
So with all of the bad data we finally found support within a trading range on Nail and other home builders.
Picking the Best Names
So once we have the theme/tailwind we can start diving into actual ways to express the views long. OpenDoor was out given their core business depends on inventory being present and their balance sheet was terrible.
So that left homebuilders, select ETFs and other ancillary real-estate names to express the long view on into what was the inflection for a lot of these names into 2023 so far.
There was also a basket of other names like RKT that were added as well but more speculation and not a Core postion.
NAIL Long +70% in 2023
In issue two of The LongVol Report this year we started the flag on NAIL and other homebuilder names since we came to the conclusion that the data was bad, could get worse but the markets simply price it in.
Execution of The Trade
NAIL was the most direct way to trade this however we did trade KBH Homes as well so let’s cover the final piece of this; the market-timing.
Market-timing is important to us because it allows for better risk-management and trade structuring. Don’t confuse this with timing it perfectly, that’s not the idea. The idea is to find a place to accumulate a position tactically so that your cost basis is as best as possible.
$38 was the desired trigger we were after and as it closed the name rallied +30% in a matter of 3-weeks.
So as we entered we already had targets for potential exits at $50 and then $60’s based on market-timing. But when a move like that happens so quickly, when you’re up +30% that quick on a sizeable position it’s hard to not trim.
As you can see from Issue 4 of the report we updated the position. We thought that this move was overdone and needed to consolidate near $40s (breakout area) and it did for the next two months before reaching nearly $60 a share.
This is why even with a Core Position that market-timing is important even with a 12+ month view on these names because it allows you to be efficient with capital. It allowed us to do the following things:
- Find an ideal are to begin accumulating
- Find areas where price could trade too
- Manage the position size
- Create the trade structure (shares + DITM etc)
Final Word
The bottom line is this. Data and opinions are only as good as the application of it – you can have all the data in the world and the strongest opinion but without application it’s pointless.
NAIL as just an example for the housing market trade at large. Constant bad data coming out with these names and then recognizing that the data was not affecting price to the effect that it did when it started to sell-off in the start of 2022.
For us at The LongVol Report we take data, fundamentals and those thematic tailwinds to understand where the money-flow is, where it could go and where it might be leaving.
But more important than that is the application of market-timing.
Without that it’s hard to be efficient with capital and to construct a portfolio that is optimized for the best possible returns.
Thanks for reading.
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About the Author
Daniel Bustamante is the founder, managing partner, and CIO of Bustamante Capital L.L.C., a multi-strategy hedge fund management firm based in San Juan, Puerto Rico. He has over 10 years of experience in the financial industry, specializing in equities, futures, and event-driven trading strategies.
He is also the founder of TheLongVol.com, a blog and newsletter that shares his insights on his investing process, travel, and other private investments. He has been featured in Bloomberg, Arizona Business Journal, Business Insider, Yahoo! Finance, Forbes, Seeking Alpha, and other publications over his career on Wall Street.
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