People love chopping wood. In this activity one immediately sees results. – Albert Einstein
Homebuilders have been on a tear since the October lows of last year, strongly outperforming the stock market on record low mortgage rates and a potential bottoming out of property prices. It’s becoming more possible that housing, which has been a drag on economic growth since 2005, may actually begin to be a net positive for the U.S. GDP in future quarters.
That’s not to say the boom times in housing are back, but rather that a gradual uptick could be underway. Investors in homebuilding stocks seem to be anticipating some kind of pickup to come, and momentum traders likely are interested in playing a continuation of the trend higher.
Outperformance certainly can continue, but perhaps it’s worth considering an investment in an area of the market that would more directly benefit from a rebound in homebuilding. Take a look below at the price ratio of the Guggenheim Timber ETF (NYSE:CUT) relative to the SPDR S&P Homebuilders ETF (NYSEARCA:XHB). As a reminder, a rising price ratio means the numerator/timber is outperforming (up more/down less) the denominator/homebuilders.
Click to EnlargeThe idea of looking at timber companies after a big run-up in housing-related stocks is to play a lagging catch-up against the broader theme: that wood, which is largely used in homebuilding, could react to the message that the homebuilders’ stock outperformance is sending.
As this price ratio trend shows, the underperformance of timber relative to homebuilders is still intact, but it may turn around in the very near future as investors look toward commodities that would benefit from increased homebuilding. You can find a number of attractive stocks such as Weyerhaeuser (NYSE:WY) and Rayonier (NYSE:RYN), which also have healthy dividend yields and have yet to participate in the market’s rally in full force.
Regardless, investors should keep a close eye on the timber group for the potential to make strong returns.