Small-Cap Housing Opportunities—Royce
article , video 05-28-2019

Bill Hench Makes His Case For Housing Stocks

PM Bill Hench on where he is finding bargains within the housing sector.


What is appealing about the housing sector?

We like the housing industry for our strategy because the valuations are terrific. So we play housing for our strategy through the builders, through component makers, right? Through people who make things like windows, through mortgage insurers, even through some traditional retailers. So lots of different plays, I think probably the largest would be the builders themselves and then maybe the financial component would be second.

There are plays in housing that you don’t normally think of as sort of new home building plays. We own a retailer that supplies flooring, and most of their business is not directed at new builds but rather on existing homes. And if we’re right about new home sales, you should see a corresponding strength in resales, and something like that will drive earnings at a company like I just mentioned.

The nice thing about this sector is you don’t need explosive earnings. You just need the economy to continue on at a nice little growth pace with a positive sign on GDP, employment to stay pretty strong as it's been. And you should be able to see sales levels that really start to add to earnings in a pretty meaningful way.

So it's a terrific sector. It's very, very broad. It's a big part of the economy, and one that really hasn’t given you the returns that you'd expect in an environment like this.

Have you been finding bargains in real estate brokerage?

We’ve been able to invest in some of the real estate brokerages. We didn't do that last cycle—we didn't think they got cheap enough. This cycle there's been some consolidation and also I think a clearer path to what the cash flows look like, which make these stocks much more appealing for us anyway than in the past.

It's a business where I think people are very nervous about margins and rates, and disintermediation by web-based services. It’ll probably happen; I don't think it's going to happen in this cycle.

Are you overall optimistic about the pace of the economy?

I think a lot of the data from both government and people like the IMF, some of the petroleum institutes, aren't as good a predictor as they once were. I think so much of the economy has changed in such a dramatic way. The way, for instance, we measure retail sales. Even employment productivity, for sure, has really, really changed. And I think our ability to capture that change has not kept up at all.

So I think the economy is probably a lot stronger than we hear from some of the data that comes out. And I also think inflation is dramatically higher, in some parts of the economy, than we think. And I think it's dramatically lower in other parts, right. Where there's been a lot of the disintermediation.




Important Disclosure Information

The thoughts and opinions expressed in the video are solely those of the persons speaking as of April 9, 2019 and may differ from those of other Royce investment professionals, or the firm as a whole. There can be no assurance with regard to future market movements.

The performance data and trends outlined in this presentation are presented for illustrative purposes only. Past performance is no guarantee of future results. Historical market trends are not necessarily indicative of future market movements.

Sector weightings are determined using the Global Industry Classification Standard ("GICS"). GICS was developed by, and is the exclusive property of, Standard & Poor's Financial Services LLC ("S&P") and MSCI Inc. ("MSCI"). GICS is the trademark of S&P and MSCI. "Global Industry Classification Standard (GICS)" and "GICS Direct" are service marks of S&P and MSCI.

This material is not authorized for distribution unless preceded or accompanied by a current prospectus. Please read the prospectus carefully before investing or sending money. Smaller-cap stocks may involve considerably more risk than larger-cap stocks. (Please see "Primary Risks for Fund Investors" in the prospectus.)



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