The World Famous "Fence Wizard": Fence Industry outlook - what can the stock market tell us?

Tuesday, December 4, 2007

Fence Industry outlook - what can the stock market tell us?

We have all been affected by the construction slowdown - especially those who are focused on residential work. When will it come back? How can we forecast 2008 and beyond. Well, no single person or indicator could do that alone. However, "The World Famous Fence Wizard" is here to guide the Fence Universe and that is what shall be done.

Lets give Wall Street a chance to help. The Wizard has developed the following fund (first of its kind) of publicly traded companies that are directly related to fence material, raw product, and the Construction Industry. The idea is to evaluate a group of companies and stocks to get an idea of what Wall Street is betting on going forward. The difficulty is that there are very few publicly traded companies that focus on the fence industry. The test fund is diversified but the focus is on companies with a strong American presence; this is not an international gauge at this time. When it comes to materials such as raw steel, zinc or timber we must remember that such markets are without doubt related to the world economy, if zinc prices are up worldwide then zinc stocks will rise even if domestic demand is weak. Also - high raw material prices often indicate a strong market but we must recognize they directly hurt end users like Fence Installers who have to pay more for product. So if world demand for zinc is high - Joe Blow's Chain Link Fence Company will pay the high demand price regardless of the strength of demand in his market . Without further ado here are the fund selections, split into three groups:

1. Residential Related industries
TWP (Trex, the largest composite fence and deck manufacturer).
HD (Home Depot - we must included the giant in building product retail).
XHB
(This is an index fund of U.S homebuilders...... new homes = new fences).
WLK
(Westlake Chemical Principal is a leader in manufactured vinyl products including fence).

1year chart for this group: down 45% combined

3 month chart for this group: Down 32.25% combined
Conclusions - as expected, residential related industry has been hit very hard, the worst of our 3 subgroups, the sub prime fiasco seems to have pushed these stocks down further, the 3 month drop is substantial.

2. Commercial and Industrial Related Industries
ZRBA (Zareba Systems, Inc. is the world's leading manufacturer of electronic perimeter fence and security systems for animal and access control).
GVA
(Granite Construction Co. is a regular play for those betting on increased spending on public works and building projects throughout the country)
DJ_2357
(Dow Jones Heavy Construction Fund - we all know that security and fence follow these projects at regular if not increasing rate)

1year chart for this group: Up 19.33% combined

3 month chart for this group: Down 14.66% combined
Conclusions: Stronger then the residential indicators because it is not dependent on the rise and fall of new homes and less dependent on consumer spending and credit worthiness. The Government will keep spending on public works -that helps holds heavy construction spending closer to constant.

3. Raw material / mining, lumber, chemical, steel etc.- again international demand affects this group and it relates to all types of end users. Did you know copper prices affect the cost of pressure treated wood posts?

VMC (Vulcan Materials;concrete and aggregate products).
DJ_1733
(Dow Jones US Forestry Index covers all the major lumber yards and mills).

DJ_1770 (This global mining index includes holdings in all the big names).
DJ_1757
(Dow Jones U.S. Steel Index)

1year chart for this group: Up 15.5% combined

3 month chart for this group: Up 8.5% combined

Conclusion: this group has gathered significant profit from worldwide demand for material, strength in these stocks, especially mining, will actually create a burden for domestic construction to recover as foreign demand drives up pricing. Another issue - the weak dollar makes it more and more expensive for American business to buy anything on the world market. For example - if a vinyl manufacturer is buying chemicals and oil derivatives it will cost more in dollars as our currency remains weak. Conversely, If you are drilling for crude in Texas you are benefiting greatly from a weak dollar that is helping to push up the price of oil. World markets are affecting your local company, it is important to understand why.

The Wizard Fence Fund Indicator totals:
All groups combined past 1 year: Down 3.4%
All groups combined past 3 months: Down 3.1%
This suggests that the forward thinking is very negative. We need to see the past 3 months beat the 52 week trend and turn positive in order to conclude any positive outlook is occuring on Wall St. Most of the weakness remains in residential building - this wont change much in 2008 and will likely get worse. Lets check back on this in 3 months and see if we can locate any improvement.

Here is a tip - try to avoid investing in any of stocks or etf's that i listed in the first two categories. In fact, you would want to do the opposite - short those groups (bet against them). As a member of the fence industry and the overall construction industry you already have significant risk and reward already built in to everything on the list. To be diversified, you need to invest in other industry. Remember all of the workers at Enron who had all of their savings in Enron stock..... bad idea. You could take a small stake in the "raw material" group - this would help "Hedge" your company against rising material costs in the same way that Airlines invest in crude oil futures. You too would want to have some investment in energy, this would help to "Hedge" your bottom line against things that hurt your company like higher fuel prices and electric bills. If stock in Exxon Mobile drops - don't worry too much, your probably paying less on fuel for the company fleet. Please remember - these are very basic concepts to consider and not right for everyone.

Related Articles of interest:
World Fence News Contributer Jim Lucci describes the tight rope for the fence industry.
Jp Morgan Analyst predicts Lumber Markets have reached bottom.
Matt McCall, president of Penn Financial Group says its time to look at investing in homebuilders.
World Fence News Staff Aritcle "December Field Report"

8 comments:

Devin said...

Mr Wizard,
How do you compare this market and its challenges against past corrections - is there something unique here or can we look back at a pattern and get some answers.

Thanks,
Devin Harris
Mountain Fence Co.

The Fence Wizard said...

Devin,
This market is challenging because for the first time we are dealing high raw material costs and a weak markets - this likely has not occurred prior because The US market always dictated the majority of demand for material. Now with China and India eating up material and places like Dubai emerging from the sand we have a dilemma.

I think the reality is that every local economy and sector will be different. Foreclosures will be hitting CA and FL hard in 2008. This week we are hearing a lot about a possible bailout of those that secured bad loans that they could not afford. This will manipulate the real estate market but stabilize the credit market, banks, and other sectors like construction to some degree. Trouble is ahead for many who are not prepared for residential customers to be low on cash. The creative and efficient will survive, others simply wont.

Mark said...

Mr Wizard,
Your fund got some attention on the yahoo finance message board for its creativity but I have some questions.
Why didnt you just select fence companies only for the test fund?
Why not include a company like Weyerhauser that makes lots of fence lumber?

Mark
JG Edwards

The Fence Wizard said...

Mark,
Thank you. Good Questions.
First - as stated it is unfortunate that many of the big names in fence wholesale, distribution, and manufacturing are not publicly traded. Some do provide market guidance through "PR Newswire" and other sources. However, if we were just to believe guidance from the horses mouth we would not have ever thought TREX stock could fall over 75%. In regard to Weyerhauser, yes we considered them along with many other mills - they are all included in the Dow Jones Forestry index in our fund - this was the best way grab them all. We are still considering other methods to measure guidance. The reality is that any collection of stocks will paint with a broad brush - thats what we want to find out, can we locate a trend.

Don said...

Great article, thanks
Don

Fence Wizard said...
This comment has been removed by the author.
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Good post on the fence industry outlook!!
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