Six months ago, I don’t think anybody would have predicted which exchange-traded fund would lead the ETF rankings in my Quantum Edge system halfway through the year.
You know I think investors can make more money in individual stocks. That’s because we can fill our portfolios with only all-stars, but with exchange-traded funds, you also must own the bench warmers in that sector or group.
Still, ETFs are valuable vehicles… even for people who don’t invest in them. They give us valuable intelligence about trends, money flows, sectors, and themes. And they’re a good source for stock ideas:
Find a strong-performing ETF, peak under the hood to see what stocks are powering it, and then analyze their potential.
In my case, I start that process by running through my Quantum Edge system to gauge fundamental strength, technical strength, and Big Money inflows.
Which brings us to the #1 ETF in our Quantum Edge system as we hit the midpoint of 2023…
iShares U.S. Home Construction ETF (ITB).
Home construction?
Mortgage rates have zoomed higher than they’ve been in two decades, and an ETF of homebuilders and related stocks tops the list?
Yes. And the data doesn’t lie.
Let’s talk about what this tells us and whether any stocks in ITB might be worth buying…
It Actually Makes Sense
My first reaction to ITB leading our ETF rankings: The economy can’t be in too bad of shape, right? Despite all the talk about the Federal Reserve overshooting on interest rates leading to a possible recession.
The only way this makes sense is if investors are looking ahead to stable interest rates – even rate cuts further into the future – and an economy in which people have jobs that allow them to afford mortgages.
That lines up perfectly with what I have seen all along in my data – that Big Money is not investing as if a recession is in the cards.
It also lines up perfectly with my expectation for a big and highly profitable finish to 2023. Now is the time to be getting yourself in position.
ITB’s strength isn’t just some recent rally after the Federal Reserve left rates unchanged two weeks ago. It has continued powering higher since the market bottomed last October, and it has nearly tripled the S&P 500 already in the first half of 2023.
While such stellar performance from a home construction ETF may be surprising, it’s not irrational. The economy remains strong enough that people want to buy homes, even with higher mortgage rates. At the same time, people who already own homes are mostly staying put… because of those same high rates.
The result is a smaller number of existing homes for sale. Inventory is only about half what it was in 2019 before the pandemic.
New-home sales, however, are back to where they were before the pandemic, thanks in part to plentiful inventory. Homebuyers have more choices with new homes, and homebuilders keep building to meet demand.
Add it all up and ITB is our midyear leader with excellent strength across the board, as measured by my Quantum Edge system:
- Quantum Score: 77.3 (70 to 85 is the strong but not overheated zone)
- Technical Score: 82.0 (excellent)
- Fundamental Score: 70.5 (very strong)
Treasures Under the Hood
With ITB surging nearly 40% already this year, there must be some stocks in it worth owning on their own.
If we dig into the fund’s specific holdings, we do indeed find highly rated individual stocks that generally meet my buy criteria.
The top three stocks in ITB by weighting – which account for 35.6% of the ETF – have gained about 38%, which match’s the fund’s performance to date.
D.R. Horton (DHI) is both the largest homebuilder in the U.S., the largest holding in ITB (15.25% weighting), and the top-ranked homebuilder stock in my system.
As a reminder, I call my overall rating for a stock its Quantum Score. It incorporates nearly 30 different factors and proprietary algorithms that ultimately measure a stock’s fundamentals, technicals, and Big Money inflows.
DHI’s Quantum Score is an outstanding 86.2. To be honest, that’s borderline too high for an entry point. I find the optimum Quantum Score for buying a stock is between 70 and 85. When a stock gets over 85 and has a super high technical score – which DHI does, at a blistering 91.2 – it often indicates a short-term pullback is coming.
And indeed, DHI is one of our top performers in my Quantum Edge Trader service. Its gains have taken it above my recommended buy limit.
But it remains a compelling stock to watch and consider on pullbacks because its Fundamental Score is excellent, at 79.2. That business strength combined with lots of Big Money interest – 12 buy signals in 2023 so far – are excellent predictors of higher prices.
Lennar (LEN) is the second-largest homebuilder (by revenue), and it rates nearly as well as DHI. LEN’s Quantum Score is 84.5, with fundamental and technical ratings similarly powerful to DHI. And it also has tons of Big Money support, with 13 buy signals this year.
Fellow homebuilder NVR (NVR) brings in about a third the revenue of DHI and LEN. Its scores are slightly lower but still strong across the board. Its Quantum Score is slightly lower, at 79.3, and it also may be less overheated, with a Technical Score of 85.3.
From there, the Quantum Scores on ITB’s holdings start to dip. But that’s what we would expect.
The whole purpose of my system is to weed out everything but the cream of the crop. In the end, fewer than 1% of the more than 6,000 stocks I screen every day are even worth considering as buys.
So, three ideas out of one ETF is pretty good. And so is the outlook for what’s coming.
Focus on powerhouse stocks like those we’ve talked about today – powerful business strength, technical momentum, and Big Money buys – and you should be in great shape for the Big Lift that’s headed our way.
Talk soon,
Editor, Jason Bodner’s Power Trends
P.S. Data may surprise us sometimes, but it never lies. And it doesn’t get caught up emotionally in price swings, ever-changing headlines, or fear.
And that’s crucial, because in my experience, human emotion is the number one reason most people fail to capitalize in the markets.
That’s why I worked for more than 20 years, logged countless man hours from some of the brightest minds in computer engineering, and spent a lot of money developing and testing my Quantum Edge system.
I identified the important data and the right way to analyze it to best predict a stock’s movement. Then I wrote my proprietary algorithms and fired up the computers that analyze more than 6,000 stocks every day… to find the absolute cream of the crop with the highest probability of making money.
The top-rated stocks are sometimes what you would expect, and other times they surprise me. Either way, they are the rare stocks (the top 1% or less) best positioned to grow your wealth.
You can learn more here about putting the system to work for you… and how to receive instant access to my latest recommendations.
