Building Profits in Builders

06/04/2014 8:00 am EST

Focus: REAL ESTATE

Chris Versace

Editor, PowerTrend Bulletin, Growth & Dividend Report, and PowerTrader

April housing starts climbed 13.2% to 1.072 million units; this was the first month since December that housing starts crossed the one million mark, and the April figures were even stronger than those in December, observes Chris Versace, editor of PowerTrader.

Housing data released in recent days—better new home and existing home sales for April, as well as a nice move in pending home sales—show the housing market is getting back on track.

Toll Brothers (TOL) jumped on the bullish housing data and a clean earnings “beat” by the company.

To me, however, the most telling figure was the drop in single-family housing inventory levels—I continue to see the homebuilders having to bring more housing—at more affordable levels—to market.

That demand helped Toll Brothers report a stellar quarter with a 36% year-over-year increase in deliveries.

The combination of industry inventory levels to near record lows and the recent dip in mortgage rates tells me we have more gains to go in TOL shares. TOL shares are a buy at current levels.

The need for more housing has been the thesis behind my recommendation for you to add the SPDR S&P Homebuilders ETF (XHB) to your holdings.

Meanwhile, one area of the economy that continues to see a pickup in activity is non-residential construction, which encompasses more than 15 subcategories, from manufacturing and power, to educational and commercial.

The Dodge Momentum Index, a monthly measure of the first report for non-residential building projects in planning, which have been shown to lead construction spending for non-residential buildings by a full year, rose more than 8% in April.

Following dips in February and March, owing to the winter weather, the index resumed its upward track in April and is up 17.8% compared to the same month a year ago.

Prospects for commercial development are again showing improvement, as reflected by the growing volume of projects at the planning stage, and strengthening market fundamentals such as occupancy rates and rents.

To profit from this trend, my recommendation is for you to add shares of the PowerShares Dynamic Building & Construction ETF (PKB) to your holdings.

Breaking down the April construction figures, we saw good growth in office, lodging, and commercial building, as well as public construction spending. All of that bodes well for your shares of PowerShares Dynamic Building & Construction.

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