🗞 3 Reasons I'm Bearish Construction (And How to Trade it)

WHILE YOU POUR THE JOE… ☕️

10% in less than one month, without many of the headaches that come from this business. 📈 

That’s right, in this YouTube video above, I pitched a long/short equity idea in the transportation sector:

Long $LSTR and short $CNI for several reasons outlined there.

However, there is still plenty of upside left in this idea, considering our exit target is $100-$105 on the spread. 🎯 

Today, I will walk you through another potential opportunity to compound your money while remaining completely uncorrelated to the S&P 500.

Before we start, I have a little gift for you:

The entire long/short equity process can take several hours to explain. I fully understand that everything I do is only the tip of the iceberg for you.

Which is fine,

But you can’t truly expect to make the sort of life-changing returns from a strategy you don’t fully understand.

So I am inviting you to join our free 5-day email crash course, where by day 3, you will already be miles ahead of most retail traders.

By the time you’re done, you’ll probably wonder how you can truly learn the ins and outs of what we do behind the scenes.

In which case, you can also apply to our flagship program, The Sovereign Trader ($6.499) ✅ 

Six months, and you’ll never look at the market the same way again.

Speaking of long/short, let’s get on with today’s email 📧…

FINDING YOUR NEXT PAYCHECK
Workers on Vacation

A few newsletters ago, we warned you about building permits crossing into a depressed state. 🐻 

We’re officially there as the output is now below the long-term balance and making its way lower to levels not seen since COVID-19.

Naturally, I want to be bearish on homebuilders and construction materials (not infrastructure ones).

But,

I can’t just take one driver like the building permits and go risking my money, so here are three reasons why I am turning bearish on the sector: ⬇️ 

No Help Wanted

1,872 construction jobs were added last month.

Which is still higher than the same August of last year, but the monthly trend definitely looks like a cold market to be looking for a job.

This can be due to a few reasons:

1. Immigration crackdowns are sending construction workers back

2. Housing unaffordability and higher cancellations on homebuilders putting projects on ice

3. Tariffs driving lumber and metal costs higher disincentivize builder activity

The industry is letting people go, and now we have another angle backing up our bearish building permits view.

Let’s move on.

Empty Carts

Our bread and butter, the PMI indexes.

Service readings show that real estate and construction reported the biggest contraction in new orders this month.

For construction, this has now become a quarterly contraction, and I don’t see anything on the horizon looking to turn this around.

Now for manufacturing, we see a similar trend for Wood Products.

Contracting orders over the past quarter, an extension to the builder slowdown and bearish outlooks for real estate.

Where are the odds now?

Simply put, chances are there will be an EPS contraction all across the sector, and that’s where I want to place my bets. 📉 

Outliers Confirm

Homebuilders report (justifiably) anemic EPS growth for the next 12 months.

Only 5% on average, which is why they trade at a forward P/E ratio of 16.9x to fall below the industry average of 20.8x.

I think we can agree that’s our best chance at finding shorts.

But what if we’re wrong?

I think there’s something going on in the Wood Products industry. Notice that the 77% EPS growth forecast commands a forward P/E of 26.9x above the industry average.

This is the sort of idea-generation skills you can begin to build by day 3 of our free 5-day email crash course.

From here, all that’s missing is the stock selection process and portfolio modeling.

But that’s the easy part.

What’s hard is actually learning how to do this.

Which is why I’ve taken everyting I learned at Goldman Sachs and created The Sovereign Trader Program where:

• You understand how to generate ideas like the pros do

• Properly hedge your positions and portfolio

• Land yourself on multi-bagger plays like $INTC $BABA and many others

Give me six months, and your $6,499 investment will be the best thing you ever committed to.

Speaking of stock selection ⬇️ 

Now trading at 12.7% off its 52-week high, the $XHB homebuilders ETF is officially in correction territory.

I believe the market is simply correcting the fact that these businesses won’t deliver on any EPS growth and yet are trading at P/Es above the S&P 500.

Now we have a trifecta of justifications, this one coming from price action itself.

Stick around, because in our next newsletter, I will show you the stocks I plan to build a portfolio around.

100% Long/Short Equity.

Oh, and if you want to get that trade alert first (so you don’t miss out on another $LSTR / $CNI 10% pop)…

Join our WhatsApp Deal Room (7 days free, $50/mo after) to get it delivered right to your phone.

You will also get the full Excel model for this portfolio, as well as valuation models for other value plays we are taking on (the latest one in healthcare is up 10% in a week).

To your success,

G 🫰 

GO AND MAKE IT HAPPEN
Are We There Yet?

Many are calling today’s market a speculative bubble.

I can’t say for sure that it is or isn’t, and whether this is the beginning or the end of a cycle.

Price says one thing and fundamentals say another, which is why I remain market neutral through a long/short strategy.

However,

Today’s book recommendation 📖 will hopefully help you understand previous speculative cycles and get a feel for where we are today and whether this market is a bubble or not.

To your success,

G. 🥃