Housing-related consumer discretionary stocks are being traded on interest rate sentiment this year.
After a 15.5% decline in June, shares of wholesale swimming pool products distributor Pool Corp. (POOL -3.33%) rose by 21.7% in July, according to data from S&P Global Market Intelligence. Why such volatility in the shares of a swimming pool products company? After all, this isn’t a speculative biotech or a one-solution IT company.
The inherent volatility in Pool Corp.’s share price
The answer lies in the probability that this will be the year when the interest rate cycle turns. Whether long-term investors like it or not, investors, both on the long side and those shorting individual stocks, will play the guessing game of when the Federal Reserve will cut interest rates or make statements supporting the notion of cutting rates.
It’s a relevant question to Pool Corp. investors, because a significant portion of its revenue relates to consumer discretionary spending on pools, notably new pool construction. With high interest rates making monthly mortgage payments more expensive, there’s a natural slowdown in home sales, and homeowners feel their housing asset values are under pressure.
That’s bad news for the housing market and causes homeowners to be cautious before they spend money on swimming pools.
Pool Corp. has a better July
It’s no secret that rates have stayed higher than most expected this year, and Pool Corp.’s stock has been under pressure. It’s not just sentiment-related, because the slump in June partly came down to management’s update in late June on the swimming pool season, its second quarter, and full-year expectations.
Image source: Getty Images.
The June update was disappointing, with management estimating that new pool construction activity could be down 15% to 20% for the year and remodel activity down as much as 15%. Management also said its first-half sales were trending toward a 6.5% decline, and the full-year performance would be similar.
What happened in July
Fast-forward to the actual second-quarter earnings, and although management kept its earnings guidance of $11.05-$11.45 and its industry outlook intact , its first-half sales declined just 6%.
Image source: Getty Images.
The difference between a 6% and a 6.5% decline, as implied in June, might not seem much, but it’s enough to discourage short-sellers and encourage Pool Corp. bulls. Management put the improvement down to a “notable improvement” in daily sales in the last week of June. CEO Peter Arvan noted during the earnings call: “The results that we see in July so far are encouraging. They’re strong similar to the last week that we saw in June.”
The improvement may be due to the hot weather, but long-term investors won’t care too much. For them, the interest rate guessing game is just noise anyway.
Lee Samaha has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.