The numbers are in, and the professional traders on Wall Street have begun to give Main Street investors like yourself a taste of where the big money is about to be made. Their many hours of analysis and rigorous search for the best place to put their capital to work have landed analysts at The Goldman Sachs Group Inc. (NYSE: GS) in one simple yet elegant play for this cycle.
By catching a bit of the “top-down” analysis process employed at the big investment houses, you can see why stocks like Mueller Water Products (NYSE: MWA) will be shining in the coming months. With a double-digit upside ahead, Goldman has chosen it as one of the top picks in the sector. Markets left behind clear evidence suggesting that they love it as well.
Also part of a construction stock play, Mueller stock is riding on the same tailwinds Warren Buffett spotted when he decided to buy into homebuilders like D.R. Horton (NYSE: DHI) and others. Those stocks have been getting a lot of attention – and price action – lately, but you can still get in early for the next wave supporting the real estate boom that’s about to hit the market.
The Big Picture
You may already know the hype sending the broader stock market indices, like the S&P 500 and the NASDAQ, to all-time highs. The Federal Reserve (the Fed) proposed cutting interest rates later this year. However, there is still some uncertainty as inflation readings and employment keep sending mixed signals.
Traders are pricing these cuts for May of this year, according to the FedWatch tool at the CME Group Inc. (NASDAQ: CME). This means that big money will start its rotation now based on the expectation of what will come in the changing rate cycle.
While some may chase the potential new ceilings made in technology stocks, specifically in names like NVIDIA Co. (NASDAQ: NVDA), others follow the “top-down” drilling mentioned earlier. The ISM manufacturing PMI index can be a great place to find the next trend.
Over the past quarter, the metals industry sent out expansionary readings for three consecutive months. Not only that, these readings have been accelerating. Over on the Services PMI, the construction industry is also sending similar readings.
Contracting in December and expanding more aggressively over January and February, Buffett seems about to get a big payday in his homebuilding stocks. Potential interest rate cuts can increase construction activity as new homebuyers get a stab at cheaper mortgage rates.
It is no wonder that the Vanguard Real Estate ETF (NYSEARCA: VNQ) pushed out a 5% performance over the past quarter, which is significant for a low-beta sector like real estate. More specifically, residential real estate is taking the spotlight today.
A Helping Hand
Over the past quarter, one real estate area is beating the ETF benchmark, and for good reason. Equity Residential (NYSE: EQR) outperformed the ETF by 3% during the period. It is clear that the market is accepting the growing tailwinds in residential construction, and that’s where Mueller Water comes in.
Mueller is at the forefront of the residential construction boom by making the necessary materials and designs for water systems. You cannot build a house without providing the necessary pipe and water system, right? Well, that is why there is a double-digit upside in that stock today.
Goldman Sachs analysts see a price target of $17 a share in the stock, directly calling for a 13% upside from where it trades today. Expecting the next set of quarterly results to look much better than the last one, markets are also preparing their bids for some upside in the name.
While the rest of the steel and pipe industry trades at an average price-to-earnings (P/E) ratio of 10.5x, Mueller stock is valued at a significantly higher 22.8x multiple. A premium of 118% to the sector could make some turn away, thinking it is expensive.
Remember the saying “It must be expensive for a reason” because it applies here. Knowing what you know now, it should be no surprise that the broader market expects a blowout quarter to be reported from this stock, especially now that the writing is on the wall for residential construction to take off.
More than that, the industry is set to grow its earnings per share (EPS) at an average rate of 11% over the next twelve months. Analysts projected 17.4% growth for Mueller’s EPS during this period, further justifying how markets value the stock today.
