The markets momentarily put away their concerns over Italy's financial situation to cheer the stronger signals emanating from the U.S. housing industry. Just a day after the Dow Jones Industrial Average plunged thinking the dominoes of Europe's financial crisis were lining up again, the index bounced back 116 points, putting it within 100 points again of the 14,000 level.
New-home sales in January surged 16% to 437,000, easily beating analyst expectations of 383,000 and hitting a peak they haven't seen since mid-2008. Obviously, that was reason behind the jump in Hovnanian Enterprises stock, but the following two names had their own causes to celebrate. Still, resist the urge to high-five everyone in the cubicles next to you. Smart investors won't celebrate until they know why their stock surged, because without a fundamental basis for the bounce, these stocks could just as quickly make the return trip down.
Office-based real estate investment trust Commonwealth REIT rocketed nearly 54% higher after two of its largest shareholders, Corvex Management and Related Cos., said they were willing to bid at least $2.1 billion for the REIT in an effort to halt Commonwealth's previously announced 27 million share secondary offering. Once they have completed their due diligence, the activist shareholders believe they'll be able "meaningfully increase" their $25-a-share offer.
The hedge fund operators own 9.8% of Commonwealth's outstanding shares. They wrote a letter to the board saying they believe the REIT's assets are worth $40 per share, and with a better team in place the stock could easily rise to $50. Corvex and Related oppose the massive dilution the REIT's offering would engender, as it would lower the dividends paid to shareholders. According to data compiled by Bloomberg, the offering would dilute shareholders by 30%.
Yet as the Fool's Sean Williams notes, Commonwealth has a poison-pill defense in place that makes it difficult for activists to gain control of a company. When a threshold of shares owned by outsiders is crossed, it triggers an even more massive dilution of the company's stock. Although often referred to as a "shareholder's rights plan," critics contend that poison-pill defenses are really a "management entrenchment program." No doubt the hedge funds have a difficult task ahead of them.
Propping up growth
Three months ago, I suggested that U.S. Silica was stealing market share from CARBO Ceramics because industry conditions in the oil and natural gas market were such that drillers would try to conserve costs as much as possible and the proppant manufacturer's sand mix was a lower-cost alternative to its rival's ceramic beads.
Proppants are granules that are mixed with fluids, which drillers pump into wells under high pressure. When the rock formations fracture, the proppants prop open the fissures and allow the oil and gas to flow freely. U.S. Silica reported that sales of proppants to the industry soared 88% in the fourth quarter, while sales in its industrial and specialty products segment were up a meager 4%.
Last month, CARBO Ceramics reported fourth-quarter results showing that North American ceramic proppant sales volumes rose 12% and international volumes were 27% higher. However, it also said revenues were down 3% as it was pressured by lower-cost alternatives, including ceramic proppants from China. I'd say U.S. Silica's sand sales were beginning to chip away at it, too.
Although it's still a tiny rival to CARBO -- U.S. Silica volumes increased to 7.2 million tons for all of 2012, a fraction of the 394 million tons its competitor sold in just the fourth quarter -- it seems to be finding a ready market for its product.
If I had a hammer
As I noted, homebuilder Hovnanian got a boost from the better new-home sales numbers, just as the rest of the industry did. With January housing starts having been a disappointment last week, homebuilders needed a boost, and Hovnanian might just get a bigger one than most.
Many communities along the New Jersey shoreline are still recovering from the devastation wreaked by Hurricane Sandy, and though they're still digging out from the wreckage, homes will be rebuilt. According to news reports, 25 municipalities lost 5% of their tax base as a result of the storm and some $1.8 billion in federal relief money will begin flowing into the state on April 1. And Gov. Chris Christie is planning a $40 million state contingency fund to offset costs not covered by federal aid.
Hovnanian is New Jersey's biggest builder, and it stands to reason it will gain more than a bit of the business that goes into rebuilding the homes along the Jersey shore. As I've noted, it's not real economic gain that's being achieved, since the economy ends up getting back to the status quo instead of expanding, but within that ecosystem there are winners, and Hovnanian could very well be one of them.
U.S. Silica has tremendous upside as natural gas prices have flattened North American shale drilling over the past year, but don't expect the slowdown to be a long term trend. As this market looks to rebound, investors would be wise to consider Halliburton, one of the top companies in the business and one of those most in tune with the domestic market. To access The Motley Fool's new premium research report on this industry stalwart, simply click here now and learn everything you need to know about how Halliburton is positioning itself both at home and abroad.
The article Whoa! These 3 Stocks Blew Away the Dow originally appeared on Fool.com.
Fool contributor Rich Duprey and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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