5 Stocks to Sell Right Now

Over the summer, rising interest rates have been one of the most influential trends in the markets. In my view, that trend will continue, and as such, I have identified five stocks to avoid as the trend plays out.

Just take a look at this graph of mortgage interest rates year to date. The leap in rates from May to August is just staggering.

US 30 Year Mortgage Rate Chart

US 30 Year Mortgage Rate data by YCharts.

Why are rates rising?
Rates are rising, simply put, because the market is anticipating an end to the quantitative easing, bond buying, and other monetary stimulus policies currently deployed by the Federal Reserve. The sudden spike we see beginning in late May is a result of statements made by Fed Chairman Ben Bernanke, widely interpreted to mean that the Fed would be ending its programs sooner rather than later.

The mortgage industry sees the most obvious impact from rising rates. You can read more about that here. Put simply, banks sell products whose price depends on interest rates. Higher rates equal higher prices. Higher prices means fewer individuals or business will be willing to buy.

Head for the hills
But if you take a step back, the fate of interest rates also has a big impact on another industry: homebuilders.

The relationship can be seen in the chart below, which compares the percentage change in mortgage rates year to date with the stock price performance of five homebuilders. You can see that in May, right at the moment 30-year interest rates begin to skyrocket, these stocks began a nose dive, moving down essentially in unison between 17% and 26%.

KBH Chart

KBH data by YCharts.

The reason is simple enough: The cost to purchase a home for most Americans is more than just the list price. It also includes the interest rate on the mortgage used to buy the house.

Back in May, the market rate for 30-year fixed mortgages was approximately 3.35%. The payment for a potential buyer, assuming a 30-year loan, comes to $441. That same loan at today's rates -- about 4.4% -- would be $605. That is a 37% increase in monthly payment.

If rates continue to rise over the next 6 to 18 months, which most analysts think will happen, the impact on the affordability of housing will become even more significant.

Assume that same loan eventually comes with a 5.5% interest rate. That monthly payment would be $672. That's a 52% increase in the monthly payment, driven only by changing interest rates. And 5.5% is still low by historical standards.

The takeaway
For consumers, this rise in the cost of a mortgage could deter many potential buyers. For many, it will make buying a new home too expensive and lead them to purchase an existing, less expensive home. The result is fewer buyers in the market for a new home.

For national homebuilders like KB Home (NYSE: KBH  ) , DR Horton (NYSE: DHI  ) , Lennar Corp. (NYSE: LEN  ) , Pulte Group (NYSE: PHM  ) , and MDC Holdings (NYSE: MDC  ) , who produce new homes, rising rates is bad news for business.

Some value investors may claim that now is the time to buy, as the market has factored in the impact of rising rates already this summer. I disagree.

To me, these are five stocks to avoid. I think rates will continue to rise, and the full impact of this change has not yet worked its way into these stock's prices. There's still room for the stocks to sink, and I think the pain for shareholders will continue. 

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  • Report this Comment On August 20, 2013, at 10:16 PM, kankemike wrote:

    Funny, article comes out, home builder stocks go up 3%, or greater.

  • Report this Comment On August 21, 2013, at 6:46 PM, Khizhim wrote:

    To Jay Jenkins:

    I assume you didn't write the headline which has been added to this commentary. "Avoid" OK, if that means "don't buy yet," as you appear to recommend. "Sell"? You can't be serious! Wow! "Buy high, sell low"?

    I don't claim to be a soothsayer, but the indications were so clear when the Fed began to comment emphatically about the importance of the homebuilders as "agents" (my word) of economic expansion and as the "means" (ditto) by which monetary policy takes effect. Then the Fed announced it would buy MBS in order to support this sector...

    The cycle low can clearly be seen in the late summer and in the fall of 2011. For the time being the stocks seem to have peaked in May of this year; at least KBH did.

    This is one sector in which the "macro" writing seems to have been clear on the wall. I know TMF doesn't believe in market timing, but timing this sector may have been easier than hitting the broad side of a barn.

    [ I'd like to compliment the superb MF commentaries which were written by David Lee Smith during the financial crisis and in the aftermath of the crisis. He was right on the money about this sector, but, since those days, prices most definitely had their day. ]

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