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Expectations about consumer spending on new, bigger, and better homes fell short, impacting the overall performance of the portfolio presented a year ago by Ralph Mitchell, president and senior financial adviser of Braintree, Massachusetts — based Carthage Financial Group. During the 52 — week period from Oct. 7, 2005 to Oct. 9, 2006, Mitchell’s stock portfolio yielded a total return of 5.67%. Three of his recommendations, Toll Brothers, Home Depot, and Lowe’s, were all involved in the housing sector.
Mitchell says performance came below expectations within that sector as a result of macroeconomic factors including:
The Federal Reserve’s interest rate hikes reduced demand for home sales. “Higher mortgage rates meant higher payments and, in some instances, it became tougher for home buyers to qualify for financing,” he explains.
Public anxiety over the wars in Iraq and Afghanistan and a less — than — favorable view of the United States overseas “lowered demand for products provided by U.S. companies. Wealthier foreign nationals liquidated their investments in U.S. stocks and shifted that money toward international investments.”
Toll Brothers Inc. (NYSE: TOL), which develops, constructs, and sells residential housing, saw many of its construction contracts canceled, and it did not reach its earnings forecasts.
In light of the rebuilding taking place in the Gulf region in the aftermath of Hurricane Katrina, Mitchell was bullish for Home Depot (NYSE: HD) and Lowe’s Companies Inc. (NYSE: LOW). However, both Lowe’s and Home Depot experienced reduced revenue and the reconstruction of the Gulf Coast has taken longer than anticipated. Looking forward, he still likes Home Depot, giving it a buy recommendation not only because it consistently has a healthy dividend yield, but because it has a reasonable earnings forecast of 12%. He also sees Lowe’s as a buy since it is still undervalued. “Lowe’s earnings forecast of 15% seems feasible.”
Exxon Mobil Corp. (NYSE: XOM), which yielded a total return of 13.91% since Mitchell recommended it, has reported record earnings over the past two quarters. “Its trading price of $72.47 is still below its book value of $123.11. And its dividend yield is 1.8%” says Mitchell. “This company still controls such a major share of the U.S. petroleum market; this is not likely to change in the immediate future.”
An uncontested winner for Mitchell was healthcare insurance carrier Humana Inc. (NYSE: HUM), which yielded a total return of 45.98%. Although Mitchell sees Humana as still undervalued, he points out the company is entering into a new partnership with the Centers for Disease Control with the intention of providing more preventative treatments for its constituency.