The new year is here, and some are already calling the shots about how 2024 could look. Who dominates? It will likely experience a 'trader' market in the first quarter of 2024, considering where stocks finished in 2023. Because most stocks rallied during the past twelve months, some investors may want to take profits at the beginning of the year.
Think about it: your stocks are up double digits, and it is December 2023; why not wait a few weeks until 2024 is here to start selling a bit to enjoy your profits? After all, you would have delayed your tax bill by a whole year by waiting to sell. If that makes sense for your portfolio, you can bet it's the same for many others.
As these money flows kick in at the beginning of the year, and markets are ready to shift capital accordingly now that the FED is suggesting interest rate cuts, a stampede of options traders have found a new ceiling in Warren Buffett stocks like Pulte Group (NYSE: PHM) and HP (NYSE: HPQ).
Follow the money
MarketBeat gives you a glimpse into one of the most important gauges in the market, which is where the money is going today or in any period that interests you. Following the unusual call options stocks section, the end of 2023 saw a lot of above-average activity for Pulte and HP.
Because the volume focused on call options, you can assume that the overall logic behind the traders is bullish, and what better confirmation behind that belief than Buffett's quality stamp? There are plenty of solid reasons to dig into the mechanics of why these stocks, and why now?
When you dig into what is driving real estate stocks today, a bigger shift and trend is happening right now in the United States housing market. You see, most mortgages out there today were generated when rates were at rock bottom; in fact, the Intercontinental Exchange (NYSE: ICE) says most are financed at below 3.25%.
This means that most homeowners are not necessarily excited about selling because it would mean they now have to shop for a new home at mortgages nearing 7.0%, with the average home price at $431 thousand, compared to $318 thousand in 2019.
Because of that same statistic, new buyers are being priced out of expensive homes and mortgages. So, how do you fix a stalemate market with no selling and no buying? You build your way out of it.
Now that interest rates are set to decline, homebuilders like Pulte have become an attractive place to be not only for Buffett but also for the traders who surround the call options.
Take a good look
The COVID-19 pandemic created a significant shortage of chips and semiconductors, and inventory issues affected virtually all players in the industry, including HP. The company's financials will show that inventories (as a percentage of assets) lowered from 20.9% in 2023 to 18.5% as of the latest quarter.
That decline in inventory has helped the company's profitability, with the fourth quarter results showing earnings per share jumping by 10.0% over the year; no wonder analysts have been pushing the stock's price targets higher lately.
Analysts at Morgan Stanley (NYSE: MS) have pushed their price targets from $31.0 a share up to $35.0 a share, calling for a 17.2% upside from today's prices. As far as Pulte is concerned, Barclays (NYSE: BCS) have also raised their targets to $120.0 a share, which is also 17.6% above today's price, by the way!
Here's a sweetener, though: the ten-year treasury yield is paying you 3.9% as of the first trading day of 2024, and this is now a yardstick against which to measure your potential stocks. HP is competing against that yardstick with its 3.7% dividend yield, but wait, there's more.
Because the FED is looking to cut rates this year, the yields on the ten-year are also set to decline, and unless HP stock rallies soon, that 3.7% dividend will likely come above the risk-free rate that the government will offer you. If that wasn't enough, remember that patience could reward you with the double-digit upside analysts have predicted.
While Pulte doesn't offer a competitive dividend, the upside analysts could make it worth the risk. Considering that the construction activity hasn't hit the economy yet, it could be reasonable to expect analysts to raise their targets in unison once the sector starts booming.
