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By Richard Lie, Stockradar
Being a technical trader, I don't like to get bogged down in too much fundamental analysis (reading company information) because the share price tips me off, not the news. But it is still important to know the nature of the sector you are investing in and what kind of conditions it thrives on.
So before analysing the price action of the "big four" Australian builders - CSR, Boral, James Hardie Industries and Adelaide Brighton - here is what you need to know about the building industry generally, in a nutshell.
First and foremost, builders are seriously heavy lifters. They make the fourth biggest contribution to Australia's economy, about $150 billion annually, and employ more than one million people. This is why politicians and economists hope growth in the building industry will counterbalance some of the slowing growth in the mining sector.
The state of the building industry is a good proxy for the health of the overall Australian economy. And there is a vital link between building and the strength of the manufacturing sector, with periods of strong, sustained growth in construction often being matched by similarly strong growth in manufacturing.
If you own stocks, you want to see the builders do well because building is more likely to occur during expansionary times when people feel positive about the future.
Many fundamental drivers
So far, that's all straightforward. But things get more complicated when you drill into the building industry's fundamental drivers. The demand-supply dynamics are affected by myriad forces: population growth, consumer confidence, interest rates, inflation, the availability of resources such as labour and materials, and Federal and State government policies affecting housing and infrastructure projects.
Although the media likes to focus on the residential building component of construction, highlighting low levels of housing availability and affordability in the major cities, that is only one part of the story. Builders operate in both the private and public sectors, and engage in a large amount of non-residential work.
The non-residential component has been a major growth driver in recent years, thanks mainly to engineering construction from the mining boom. That boom is slowing, but if what the Federal Government has to say is correct, we can expect large amounts of public spending to take up some of the slack in the future.
The AIG Performance of Construction (PCI) Index, below, boils down the important fundamentals (those directly affecting the industry, not promises about the future) to a simple monthly number, and is well worth watching for those who follow building stocks.
Chart 1: The PCI Index
Source: The Australian Industry Group Performance of Construction Index (Australian PCI®) in conjunction with the Housing Industry Association. It is a national composite index based on the diffusion indexes for activity, orders/new business, deliveries and employment with varying weights.
As the chart shows, there have been challenges for the builders since the 2008 GFC, but the PCI Index has been trending up since mid-2012 and is currently at one of its highest levels in recent years, at 55.2 points. A figure above 50 indicates expansion.
What it means for stocks
There is obviously a strong correlation between the performance of stock prices and the PCI Index. CSR, Boral, James Hardie Industries and Adelaide Brighton have all performed well since the middle of 2012, although all recently hit major price resistance levels, as shown in the long-term weekly candlestick charts below.
Their price levels are clear, and if pressed, I don't expect them to break soon (it could take months, not weeks), but if they can, it would open up the potential for an even larger second-leg rally, and a full-steam-ahead bull market for the building materials stocks.
(Editor's note: Do not read the following ideas as stock recommendations. Do further research of your own or talk to a licensed financial adviser before acting on the themes in this story).
CSR manufactures and supplies building products in Australia and New Zealand, such as plasterboard, fibre-cement sheeting, aerated concrete products, bricks, and systems to support plasterboard construction. It also has an investment in the Tomago aluminium smelter near Newcastle, New South Wales.
CSR wanted nothing to do with the $1 level of the steep sell-off in 2012 and its two-year rally has been especially strong, with no big pullbacks, which makes me think it will eventually break the current resistance zone between $3.50 and $4.50. It could take time, given how far and quickly it has rebounded.
Boral is a multinational company founded in Australia, dealing in building and construction materials, with extensive operations in the US and Asia. Its core businesses are asphalt, road marking, concrete, plasterboard, timber, windows, quarry, landfill, transport, roof tiles, bricks and pavers.
Boral has the look of a draft horse rather than a thoroughbred on the share price chart: steady and dependable, but underperforming its peers in the "rally stakes". The recent sell-off is a little concerning, although it occurred at an obvious resistance point, so let's see if the up-sloping trend line can support it here. I'm not sure. But the larger trend is still very much up.
3. James Hardie Industries
James Hardie is an industrial building materials company headquartered in Ireland and listed in Australia. It manufactures and develops technologies, materials and processes for the production of building materials, specialising in fibre-cement products, in which it is a major player.
This stock is a thoroughbred. You don't need to check James Hardie's profit-and-loss statements to know it's a growth stock, thanks to improvements in the US housing market, where it is expanding production and dominates the market for fibre-cement.
The share price break above the previous record high at $10 was significant and the ensuing rally tells that story. I don't expect the price to return to $10. To be a buyer, however, I need to see it break above $15 on a weekly closing basis. Ideally, the current "flag" (a classic continuation pattern) between $13 and $15 will also hold.
4. Adelaide Brighton
Adelaide Brighton is an Australian manufacturer of cement, lime and dry blended products, focused on the construction, engineering, infrastructure and resource sectors. It has three main operating divisions: cement and lime, concrete and aggregates, and concrete masonry products.
I would like this chart a lot more if we had not seen the recent share price breakout fail. Large swings like the one identified above in the chart, are not what a technical analyst wants to see. Adelaide Brighton created a new trading range, with levels that might contain price for some time to come.
The news catalyst for the failed breakout was the loss of an important contract in South Australia, and that unanticipated loss of revenue is telling the story behind the chart. I am cautious on Adelaide Brighton until I see more constructive price action. If it can hold above the breakout level of $3.80 again, that would be positive.
About the authors
Richard Lie is founder of the hedge fund Crusader Capital Management, and the stock advisory service Stockradar which is currently offering free trials. Scott Athorne is a journalist.
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