From a performance perspective, it seems to be a very stock specific story as none of its peers are riding the wave of enthusiasm. Currently, Boral is up more than 10 per cent while its peers in James Hardie, CSR, Fletcher Building and Adelaide Brighton are all up less than 1.3 per cent.
We’ll never know the exact reason why the stock has surged although markets do have a history of reacting positively when management wields the axe. Perhaps it’s the size of the job cuts and restructuring that has the market excited. A total $90 million in cost savings for a company that made a profit of $101.2 million last financial year is pretty damn significant! Perhaps it’s helped relieve fears of an equity raising.
Excluding Adelaide Brighton, the above chart shows just how strong the sector has performed over the last six months. This basically coincides with the point where we really started to see upside momentum in the US housing market, which continues to gather momentum, albeit off of a low base. Both Boral and James Hardie have a large exposure to the US housing market.
Given the recent strength in the sector, we’re starting to see broker downgrades on the best performers. While it’s worth noting these views, I like to look at what the market is actually doing rather than what someone thinks it should do based on a spreadsheet model.
An example in point is JP Morgan’s downgrade of Boral to underweight from neutral following its recent strength. Instead, the broker’s preferred pick is Adelaide Brighton, which has been flat over the last six months, compared to Boral’s 60 per cent rise.
A sage piece of advice when it comes to the market that’s always kept me in good stead has been to buy strength and sell weakness. In its simplest form, it keeps you on the right side of the prevailing trend.
Whatever the reason, there’s a lot more demand for Boral’s shares than those of Adelaide Brighton. My experience tells me that these trends always seem to continue a lot longer than people expect them to.
I’d be looking to buy pullbacks in the strongest performing stock in the sector rather than hoping the underperformer will suddenly start to outperform.