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These 2 Sectors Could Provide Roadmap for the Market

By: MarketBeat

September 04, 2024 at 08:50 AM EDT

Markets

When trying to figure out where the economy is going (let alone the stock market), investors often throw a handful or three indicators to keep track of without knowing which is accurate and which is not. So, to keep all the noise out, investors can trust the data tested by one of Wall Street’s best investors, Stanley Druckenmiller.

He has quoted that, as recently as the beginning of COVID-19, two sectors can provide investors with a reliable gauge to give the Federal Reserve a run for its money in predicting economic (and market) movements. It may sound too simple to be true. Still, most of the best information typically is only to be dismissed as a result of needing to be more entertaining and intellectual. But, if it’s good for Druckenmiller to generate 30% returns over 30 years, it should be good for retail investors.

These two sectors are real estate and transportation, focusing on the leaders within these areas: homebuilding stocks and trucking companies. Compared to where Goldman Sachs has placed the S&P 500 for the next 12 months, investors can see how the market now feels about stocks like Toll Brothers Inc. (NYSE: TOL), PulteGroup Inc. (NYSE: PHM), FedEx Co. (NYSE: FDX) and even GXO Logistics Inc. (NYSE: GXO).

How Homebuilder Stocks Are Performing in Today’s Market

According to Goldman Sachs, the S&P 500 will see up to 5% earnings per share (EPS) growth in the next 12 months, and they expect the index to trade at a forward P/E valuation of 18.0x. This benchmark allows investors to see where the homebuilder industry is with respect to growth and valuations.

Any forward P/E below that of the expected one for the S&P 500 can be taken as a sign of weakness, and currently, the industry shows a valuation multiple of 10.9x to be well below that of the S&P 500, the first sign of a potential top in the economy. Why is this a top? Homebuilders rely on the financial stability of both banks and borrowers for new units.

So, when homebuilder outlooks are bad, it means that they don’t see a lot of strength in the underlying borrower and financial system, which is why building permits and housing starts are down by roughly 8.5% over the past 12 months. Here’s how the market feels about the homebuilder stocks individually:

Toll Brothers, PulteGroup, and Builders FirstSource

The fact that Toll Brothers' CEO, CFO, and a suit of directors in the company have been selling their stock since April of 2024 and as recently as August 2024 could be a better starting point. More than that, the consensus price target is $144.7 a share, roughly a 0.4% upside from today’s price, meaning the stock is fairly valued and no longer a bullish proposition.

Bears have also taken the scene recently, as Toll Brothers stock’s short interest increased by 7.7% in the past month alone. Meanwhile, the company’s largest shareholders sold out in August. Dimensional Fund Advisors sold 14.6% of their position recently, another sign of no confidence in this company’s future.

The story looks similar to PulteGroup. The most recent quarterly earnings show that up to 9% of all new orders fell into cancellation status, a worrying sign for the industry as a whole. Management has also been selling stock as recently as August 2024; it seems like a trend in the space.

Short interest in PulteGroup stock rose by 3.3% this month, adding to the bearish evidence surrounding the homebuilder industry. A consensus price target of $133.1 would also show only a 1.1% upside in the stock, which is not too promising by today’s standards.

Lastly, checking in with the supply side in Builders FirstSource Inc. (NYSE: BLDR), the story doesn’t change. Insider selling took place recently in this name, with short interest rising by a staggering 21.2% in the past month alone. Investors may interpret this as they will, but it’s not good news.

Trucking Outlooks Reveal a Potential Safe Haven Amid Market Downside Risks

If the economy is, in fact, heading to the top, the consumer staples sector could outperform the rest in the coming months. Armed with this information, investors shouldn’t be surprised to see trucking stocks start to show bullish signs, as they are responsible for the logistics of these products.

Knight-Swift Transportation, FedEx, and GXO Logistics

Starting with Knight-Swift Transportation Inc. (NYSE: KNX), the story looks much different than its bearish homebuilder counterparts. Wall Street analysts now forecast up to 134.8% earnings per share (EPS) growth in this stock, and those at Barclays have placed a $62 price target on it.

To prove these analysts right, Knight-Swift stock would need to rally 18.3% from where it trades today, a long shot compared to the homebuilders.

FedEx follows suit, with an EPS growth forecast of 10.7% and a price target set by J.P. Morgan Chase of $359 a share for a net upside of 20.2% from today's price. More than that, a U.S. Congress member also recently bought the stock.

The cherry on top is GXO logistics, which has the potential for 20.4% EPS growth in the next 12 months. Its consensus price target of $67.45 a share today sets a 34.8% upside.

These are the different upside and growth spreads between the economy's leaders, one showing potential risks and the other pointing to a safer place for investor capital.

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These 2 Sectors Could Provide Roadmap for the Market

How Homebuilder Stocks Are Performing in Today’s Market

Toll Brothers, PulteGroup, and Builders FirstSource

Trucking Outlooks Reveal a Potential Safe Haven Amid Market Downside Risks

Knight-Swift Transportation, FedEx, and GXO Logistics

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