J.P.. Morgan

J.P.. Morgan US Equity Strategy 100 Ideas Levered to the Housing Recovery Housing market fundamentals remain constructive with a pick-up in demand, tightening supply, high affordability, low household leverage, and easing credit standards. Taken together, we believe these are likely to be drivers of an outperformance of equities levered to the housing recovery. In this report, we identify 100 such companies with direct or indirect exposure to housing from a diverse list of industries — the mix ranges from the obvious Homebuilders and Building Products to derivative plays in Durables, Retail, and Financials, see Figure 3. After more than six years into this recovery, we believe there are few opportunities in US equities that offer stronger growth and cheaper valuation than housing. Key variables for housing recovery — the job market continues to strengthen, consumer confidence remains elevated, level of interest rates remains relatively low and risk to housing from rising rates should remain contained over the coming quarters. We recognize housing is interest-sensitive and the Fed is about to embark on a tightening campaign. However, long rates which matter more for housing are already pricing in Fed rate hikes. Even if the Fed surprises by tightening faster than what the market anticipates, LP. Morgan expects to see a curve flattening and conventional mortgage rates should not move nearly as much as the funds rate. Historically, bear flatteners are not associated with negative performance for housing stocks. As shown in Figure 34, homebuilders have outperformed the market during bear flaneners. On the contrary, bear and bull steepeners cany worse implications for performance, underlining the importance of long rates for the housing market. J.P. Morgan Economists expect residential investment growth of 8% this year and 7% in 2016. Despite the 63% increase in residential investment from $366b at the bottom (3Q10) to $595b, current activity remains depressed at 3% of GDP (vs. 4.7% avg since 1949). Outside of key macro level data suggesting significant residential investment growth, commodities linked to housing are rising and the recent search trends point to an improvement in homebuyer interest (see Figure 22). The following drivers bode well for a continued recovery and growth in residential investment: • Demand: should firm on strong labor market trends (declining unemployment rate + expected rise in wages), high consumer confidence, stronger household formation, and low vacancy rates. Since the start of the recovery, the economy has created more than I I million net jobs with the unemployment rate approaching 5%. This combined with near-peak consumer sentiment is encouraging household formation. Due to the severity of the last recession, we believe there is pent-up demand for housing, with household formation at a deficit of around 5 million, see Figure 20. Also, buying vs. renting is becoming increasingly more attractive with the median home price to rent ratio at the lowest level in 15 years, see Figure 32. • Sum*: tighter with new and existing home inventory sharply lower. The existing home supply declined from -4 million units at peak to 2.3m recently, which is similar to levels seen prior to the housing boom. As for new home inventory, the supply is even tighter at 215k units compared to 570k at last peak and 300k prior to the last housing boom, see Figure 23. If adjusted for population growth, the current supply picture looks even more constructive. Global Equity Strategy and Quantitative Research 13 August 2015 US Equity Strategy Dubravko Lakos-BuJas AC (1-212) 622-3601 [email protected] Bhupinder Singh (t-212)622-9812 [email protected] Scott A Linstone (1-212) 622-9970 scott.a.linstonegnmorgan.com Narendra Singh (t-212) 622-0087 narendra2.singh©jpmorgan.com ArJun Mehra (AJ) (1-212) 622-8030 alun.mehra©jpmorgan.com J.P. Morgan Securities LLC Table of Contents Executive Summary 1 Industries Levered to Housing 3 Housing Stock Performance 4 Valuation. Growth. Sentiment 5 Stock Screen: 100 Ideas 6 I-lousing Macro Rivers Derrend 9 Supply 11 Aft ordablity 12 Credit 14 Relative Valuation 15 Commodity Prices 16 Equity Fundamentals 17 Characteristics of Housing Stocks 20 Housing Basket JPAIMOUS <tides> 24 Bloomberg subscribers can use the ticker JPAMHOUS <Index, to access tracking information on a basket created by the J.P. Morgan Delta One desk to leverage the theme discussed in this report. Over time. the performance of JPAMHOUS <Index, could diverge from returns quoted in our research. because of differences in methodology. J.P. Morgan Research does not provide research coverage of this basket and investors should not expect continuous analysis or addreonal reports relating to it. For more information. please contact your J.P. Morgan salesperson or the Della One Desk. See page 28 for analyst certification and important disclosures. J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. www.jpmorganmarkets.com EFTA01071289 Global Equity Strategy and Quantitative Research 13 August 2015 Oubravko Lakos-Bujas (1-212) 622-3601 [email protected] J.P. Morgan • Credit: household balance sheets at best level in more than a decade as lenders easing standards. During this recovery, households have significantly delevered, with current household debt at the lowest level in more than 10 years and mortgage service ratio at an all-time low, see Figure 36. Also, a higher percentage of homebuyers are likely to qualify for a mortgage loan with more lenders easing rather than tightening credit standards. And for some, credit scores should be improving as foreclosure related hits on credit reports cycle through after 7 years on record. • Value: compared to most asset classes, relative valuation more attractive for housing. Residential homes sell at a discount to equities, gold, and oil (i.e., it takes 137 units of S&P 500 index to purchase a median priced home in the US, which is a 48% discount to its long-term median of 260 units, see Figure 39). Even after the recent decline in commodities, Homes are a cheaper hard-asset alternative to Gold, see Figure 40. • Risk: rising home prices to household income ratio and higher rates a concern. While the job market outlook has improved homebuyer sentiment, the tepid rise in household income (+5% since 2010) compared to a more significant rebound in home prices (up 34% from the low) is a risk to a more robust housing recovery, in our view. Consequentially, the new single-family home price to household income ratio has risen to near record (5.4 years vs. 4.0 median since 1966), see Figure 42. Also, as the Fed begins to raise rates, this could be a further negative for affordability given that every 50bp increase in mortgage rates is equivalent to roughly 5% increase in home prices. However, we feel that the most likely scenario is a bear flattener under which the mid-to-long portion of the curve (which is more important for mortgage rates) is less affected. Housing stocks enjoy stronger fundamentals with domestic exposure at a cheaper multiple than the market: growth at a reasonable price. After more than six years into this recovery, we believe there are few opportunities that offer stronger growth and cheaper valuation than housing. In fact, if housing stocks were a unique GICS sector, it would offer the strongest earnings growth and second cheapest valuation. Based on consensus estimates, housing stocks are expected to grow earnings by roughly 50% vs. 30% for S&P 1500 companies during 2015 through 2016. As for valuation, we believe the domestic linked housing sector does not deserve multiples inline with the cheapest Materials sector, which has meaningful exposure to China. • Improving sentiment implies that investors no longer view housing as toxic and there could be additional accumulation by institutional investors. Whether you gauge the sentiment by the Street's analyst ratings or short interest, housing stocks have seen market participants slowly turn more constructive. Housing stocks have an elevated short interest as % of float (4.6% current vs. 17% at peak) compared to rest of the market at 3.6%, see Figure 10. The Street's sentiment has also been improving with the average stock rating now similar to the rest of the market, see Figure II. • Higher revenue growth and margin expansion is expected to drive double-digit earnings growth. Housing stocks on average offer stronger revenue growth between 5-6% in the coming quarter compared to low single-digit growth for S&P 500 (ex-energy). This combined with margin expansion is expected to drive double-digit earnings growth in the upcoming quarters. • Significant margin expansion: the Street is expecting significant expansion for housing with net margins expected to increase from 6.4% (last four quarters) to 7.1% over the next four quarters (3Q15-2Q16), see Figure 50. Based on estimates, margin expansion is expected to be driven by declining commodity prices while SG&A expenses are expected to rise. • Shareholder yield now near 5%, higher than S&P 500. Perhaps due to the uneven growth and highly cyclical nature of most companies levered to housing, the shareholder yield has been volatile. In the last twelve months, the total shareholder yield increased to 4.7%, which is higher than the S&P 500 at 4.1%, which is attractive for yield-seeking investors in a scarce yield environment. J.P. Morgan US Housing Basket (JPAMHOUS <Index>): a preferred way to play the recovery in housing. The J.P. Morgan US Housing Basket is composed of a diversified portfolio of companies that have direct or indirect exposure to the US housing market and should benefit from the continued pick-up in residential investment. Basket constituents are screened for liquidity (trade at least $1OM ADV), and include direct beneficiaries of housing (e.g., Homebuilders, Building Products) as well as derivative industry plays (e.g., Durables, Retail, Financials). The basket contains 65 names, and the weights are optimized to replicate as closely as possible to an equal-weighted basket, subject to a maximum of 10% of ADV traded in any single name within a $100M basket. The basket can be accessed on Bloomberg via ticker JPAMHOUS <Index>. • Basket Performance: An examination of hypothetical performance shows the basket — JPAMHOUS <Index> - would have returned +17.7% on an annualized basis over the last three years, narrowly outperforming the S&P Homebuilders Select Industry Index (SPSIHOTR Index), which returned +17.3% over the same period. The correlation of the basket to the SPSIHOTR Index is 93%, and the recent 6M realized volatility of the basket is 11.9% (the realized volatility of the SPSIHOTR Index over the same time frame is more than 2 vol points higher at 14.1%). 2 EFTA01071290 Dubravko Lakos-Bujas (1-212) 622-3601 [email protected] Global Equity Strategy and Quantitative Research 13 August 2015 J.P.Morgan Equities Levered to a Recovery in Residential Investment Housing market fundamentals remain constructive with a pick-up in demand, tightening supply, high affordability, low household leverage, and easing credit standards. Takcn together, we believe these arc likely to be drivers of an outperfonnance of equities levered to the housing recovery. In this report, we identify 100 such companies with direct or indirect exposure to housing from a diverse list of industries — the mix ranges from the obvious Homebuilders and Building Products to derivative plays in Durables, Retail, and Financials, see Figure 3. We recommend investors gain exposure to housing stocks for their growth at a cheaper valuation. Figure 1: Residential Construction as % of GDP Figure 2: Residential Construction Since 1949 USD billion, sear so:o 2% 1119 1964 1959 1961 Me 1974 1979 1904 1959 1994 1999 2001 2009 2014 Source: J.P. Ragan and Blacoterg s)e6 A91 sera 5519 5616 $516 SSBS 95tI 3619 5196 am 3400 3210 3160 - Source: J.P. Morgan and Bkcirsig Figure 3: Industries Tied to Housing See Figure 12 through Figure 14 for a full list of 100 ideas bed to the housing recovery Mortgage/Title Insurance Mortgage Finance Regional Banks Financials Single-Famil y REIT-As Land Plays Internet Services Real Estate Brokerage Source: J.P. Morgan Homebuilders 4 Housing Business Services Construction Materials Timber/Commodities Chemicals Building Products Electrical Components Building Electrical & Mechanical 441/4 Household Durables Retail Mechanical Specialty Retail Home Improvement Retail 3 EFTA01071291 Duhravko Lalcos-Bujas (1-212) 622-3601 [email protected] Global Equity Strategy and Quantitative Research 13 August 2015 J.P.Morgan A diverse list of industries tied to a recovery in housing. In this report, we identify approximately 100 companies that have direct or indirect exposure to US housing and should benefit from the continued pick-up in residential investment (see Figure 12 - Figure I4 for a full list). As shown below, the housing plays range from direct beneficiaries of housing (such as Homebuilders, Building Products, and Land Plays) to derivative industry plays (e.g., Durables, Retail, Financials, etc). The housing plays that we identified have a combined market cap of $592b and represent 3% of total market. As shown in Figure 5, these companies offer significant sector and industry exposure. Figure 4: Sector Breakdown: Housing Composite Figure 5: Industry Breakdown: Housing Composite P4 Mt Kyr 144 Lei Mee. Pelynan• WO companies. equal-weighted 44efla Technology, 2 Median MC* I Miley I Wawa OD n TIE 1Tr an 1.14344fteCtetes 25 1331 111 1125 lib 01% 45% •53% Say Peak 1 1413 la 3124 24.04 .11,4 41% •1241% Dana SW 1134 Mb let a a 411% VI4ten313, 14 an bee hien' ri.es lilt alb VP VA a a '7% Ronk ;WS 7231 It* 2434 la* 4% 42e4 •14% twee/ 4,1)4 Ilk 1434 1144 -17,4 4% PC% hen 2344 1274 1625 lib 4% 43% ail,. Tow: too Rad Elianingan /Cod Companke Re 7244 3134 9134 1% I% pit 1114,2%**Faao 2111 141 Mb It 22.1% 4:1% 41414 Cak033.424114 1331 1234 4/34I* *a 41% •11,4 Pare 4423012243:5 1234 tik 4Th Ha 4% •11,4 •21% Tel% Covreed Deena 3.141 21k 24/4 21* 44% *II% 43% Ens SW lit NA 13.24 41% 45% 42% Industr4I3 24 Mums 60444 SI . ISA Ilk 43% 4,4% 4a 114323444grear 100 11.44 lb Mb *7% al% A% 0442441 3* 2141125 21* Oa 414% II% Pere &Cato WY 3311 1St $34 Kb a .12% 4b: ituatiOnict SR 1St Rh la 41% 431% 4% Source: J.P. Morgan 1.4424*boul. Sassis 4314 110h . lit* a% AS% 4014 5:409 2712 a flulib .44,4 .41% OM Source: J.P. Morgan. Blomberg A lost decade for housing equities. Over the last ten years, housing stocks have sharply underperformed the market due to poor demand (low household formation) and excess supply (foreclosure homes). As shown in Figure 6 below, the peak to trough decline for housing stocks was -89% (similar to Nasdaq composite decline). In absolute terms the recovery in housing stocks has been strong (+374% from the bottom vs. +218% for S&P 1500), but it is still 47% below its all-time high in 2005. We believe housing stocks are likely to outperform the market over the next several quarters due to stronger relative growth and cheaper valuation, as discussed in the next section. Figure 6: Performance: Housing Composite vs. S&P 1500 Figure 7: Performance: Annual Performance Indexed me xe 293 to 100 on 1/1)2000. equal-weighted Housing Composite Annual, absolute and relative to S&P 1500 Absolute Pedormar 442% 428% .311% WS .4% .52% 41%01% .14% - +1% os -1% 49% -17% 200 -50% -51% 150 Relative to S&P 1500 103 47% nn *X% nn 42% K2% 441% OS 13% 50 58P 150 ■ Wi% 4% 41% 1Mr 47% 41% -32% 0 .51% 2000 2001 2002 2003 2001 2005 2006 2007 2006 HOG 2010 2011 2012 201 2311 2015 Source:J.P. Morgan. Blomberg 90 91 '02 TO DO 'C6 '06 17 18 TO 10 11 12 13 14 IS Scurce:J.P. Morgan. Blocrnberg EFTA01071292 Duhravko Lakos-Bujas (1-212) 622-3601 [email protected] Global Equity Strategy and Quantitative Research 13 August 2015 J.P.Morgan Growth at a Reasonable Price? After more than six years into this recovery, we believe there are few opportunities that offer stronger growth and cheaper valuation than housing. After multiple years of undcrperformance, housing stocks trade at a significant discount to the market even with stronger expected growth than rest of the market. • If housing were a unique GICS sector, it would offer the strongest earnings growth and second cheapest valuation. Based on consensus estimates, Housing stocks are expected to grow earnings by roughly 50% over a two-year period — this is stronger than the organic growth sectors (Healthcare and Technology) and the lower oil price beneficiary (Discretionary). As for valuation, the multiples are as depressed as Materials, which is tied to the slowdown in China while housing is largely a domestic play. Figure Housing 35.0a 30.0a 8: Valuation: WE (2016) Figure Housing 475% *SO% 9: Expected Earnings Growth: 2014-2016 AD% Stocks vs. SAP 1500 Companies Stocks vs. S&P 1500 Companies 25.0a 2ux alto 425% dim 41% 4.y. 437% +a% 422% 413% +31% 241.5x 20.0z IDS .0% 4% ish t5b 14.04 %Is lib Mk 111.1% aW 15.0z I .25% 47% lot .50% "44 Jinn/ 414/ ter st, 41 410,771"/ iDe Source:J.P. Morgan. Bloomberg Source:J.P. Morgan. Blomberg Improving sentiment implies the sector is no longer toxic. Whether you gauge the sentiment by the Street's analyst ratings or short interest, Housing stocks have seen improvement in sentiment by market participants. Housing stocks have higher short interest as % of float (4.6% current vs. 10-Yr median of 5.0%) compared to rest of the market (3.6% vs. median of 3.4%), see Figure 10. The Street's sentiment has also been improving with average stock rating now similar to rest of the market (Bloomberg Mean Rating: I= Strong Buy, 4= Sell). This implies that the sector is slowly normalizing and less likely to be viewed as toxic by investors and could see continued accumulation. Figure 10: Investor Sentiment: Short Interest as % of Float Figure 11: Street's Sentiment: Average Stock Rating Median Median 1t0% ID -- Hewn; Co-post4 Homo; Crpost4 red= —saPI500 IS SW 1930 sedan 20 25 30 35 1t0% 140% 12.0% 10.0% 10% 10% 4.0% 2.0% 0.0% 110 117 2 '03 to IS 16 Source: J.P. Morgan. Bloomberg Undemerfsesia —SIP 1500 S&P 1500 neap '07 %II 99 10 11 12 13 14 15 DS 111 '02 1.1 '111 t6 -06 117 to TA 10 'II 11 13 14 15 Source. JP. Maslen. BIcemberg 23 24 5 EFTA01071293 Quhravko Lalcos-Eujas (1-212)622-3601 [email protected] Global Equity Strategy and Quantitative Research 13 August 2015 Equity Plays Levered to Housing Theme: in the tables below, we identified housing-related stocks levered to a pick-up in residential investment. Figure 12: 100 Ideas Levered to Housing Recovery (continues to next page) Price as of as of 8/12/2015 GCS 54cte1.6..8) nIZZCZTIONI S"W' Chenkit I 2 3 4 s 8 7 8 Contlivellontlawitlx 9 10 II Pea å ~I Products 12 13 14 —Er=lillieleS 441011 Atrotpue 4 Oanst 15 0:«59,) IF1.11.1>AX,90~51:n TOW tawny SW* Ma Nil (%l al Ce901.1 Techrialt WU Eillmalt Villoill0.1 Cvnrt P6P) 524* Ifhph, 10.4 Mutt Cep Am) Vol Owl 124,c4 Crone VTO 141019 7~1 Te/5.1 Prat OM* 51,01 Avg 11$241147~111 is % et ASI I=441 Stck LOA Oil 34087 5•1.4 %ItiCt 54191 Grate. NW EPS 0.4411 N111 EN MITOA LIM PIE NW Pal PC, YNN Wa"Aks— — $3.178 $31.0 9% 0% —— 10% 3% ID 31 14% 5% it% 1234 172a 24z 5% Industry. C44.44414 aentn.‘14a-r8 Corer/ BuiOng/449P34 WesItCroncåC<t3tacr, 1140rp *rat Vabou CAwalAi 1340r0 409,04 RP1.11.41~.1 Ix. &tarp *rat satoket*ooconterromeaciformbfor, Pc150ne ~alp, &tarp Ltienit 44.51Cators»n 13.40r0 409,64 lens 9.5r114.4e. Pc &40rq/44enit Indt$113: 6~1~ ItIn1 Nall 144-414144en14 Irc Burdlil /Alt/at DP War" bc. EkidrulAiltr“ ItellAfllS FOXPOZIas, &Id Mittat lipluary: F444111 Foreu Produces 10.4~1..494tCOrtenton &ilk.) Willa SpieCascra C4 Kildtg Dahlia Piic int. 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Outrp Elen”.$ 4 MeCINTC41 LI flald 12773 $5.438 $54A 42% 21% C« C.Sthen rut RCM -17% 4% 67 40 93% 6% 31% 14/18 2350, 9414 4% 20 A O. So*C01:010” IN.46-06»dics8M.0~.41 WS WM 77/45 35301 $335 50% 24% 2% 50 40 1.7% 12% 26% 1574 20Ax 4.3x 4% 21 Oa* Corn% 13.3rpPrecits oe 54342 47.21 u.a4 5714 32% 26% N Wind Nam CPA 6% 3% 58 3.7 09% 9% 18% 948 17.51 It 3% 22 MG 0110(8511 B415,0N4A U50 531.70 32•25 54.833 3513 20% 14% N ~RS« CM 3% 3% 66 3.4 02% 8% 29% IAN 1634 9.7S 5% 21 AmairoWy111rdusres.Irc &Mr° Proclact AW 95751 Wu 53.179 5390 18% 12% N Mead Nan CPA 1% 8% 56 34 (IX& 2% I% 11.5« 223 4.2* 1% 24 Weexi8Pwrelone10,44 BL03,0~<6 DOOR 565.33 7342 32025 $150 13% 9% 6% 46 43 - - - 193* 31.1. Us - 25 Camp/Six.* ScelYa8L11. BuNrg Pecan CM $53.46 12(45 MD 511.7 24% .10% CM lAdnel Fan CPA 30% 3% 18 43 OA% 18% 15% IA« lilt 59, 0% 26 troc.n Mertlearin, CO. 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Blomberg J.P.Morgan 6 EFTA01071294 Dubravko Lakos-Bujas (1-212)622-3601 [email protected] Global Equity Strategy and Quantitative Research 13 August 2015 Figure 13: 100 Ideas Levered to Housing Recovery (continues to next page) Price as of as of gi12(2015 34 35 35 sr 30 tC *tte?0Al tnce, 1PMW.6np Omaitakn TO4r CagnY Stab Price Pal N JP11Coverag9 Teclnkb NES Estimates Verbs O07011 R1/44 52 Ill. 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Koren. irc Ibreetukke WO WM 30119 sio.ms $1038 41% Id N Mead Ream CFA .1% It% 25% II* 110* It 7% 44 Lean C0,10,810.1014314 Itnitylin LEN 551.13 $1136 $8949 51630 42% 15% OW WISP Renart CFA 4% 23% 17% Ilk 14.14 214 7% 45 PatotaIrc Hortatukt HIV 120.40 23417 $1.260 $1172 Id% .4 UW LkInd Brat CFA 1 II% 7% 10.34 1414 It 11% 45 T011tate4.1ct 14)01)(0344 Ta 539.22 Mt 58105 $953 19% 13% VW 1.4000144614 CFA -11 20% 19% 143* 15.14 1.74 6% 47 Usti & Rat IrcoTaratd 5.3rg Prctri LEG $47.71 61,23 $6525 $480 45% 12% 6% 16% 1114 21.14 619 4% 48 1.511.1‘ Itaitolyer 61911 51.51192152341051 $6143 $425 34% N 1.40001449404 CFA -11 20% 35% 1014 1594 419 5% 49 Slardad Pads Cap Iteenulke SPF kW 90 $2426 $01.1 Id% 13 NA Lkluel that CFA 28% 36% 1214 122* IA 11% 50 TRINE* GIcu01,4 Itnitowr TPH 571.49 17113 52391 sae 10% -3% 98% 78% 24.14 107* It - 51 RItr4Gro4.1r4 Honnunte RYL 14413 6030 WS $102 83% 13 NA 1.441.41 that CFA 17% 15% 1021 11.44 It 14% 52 Ve111916o*60Y10•414r. Itaity114( MTH 542.33 5022 51.111 5230 13% 20% UW 14440014494•4 CFA 1% 24% 32% 1444 10.44 1.54 9% 53 U.D.C. HAIN% tc. Honetukt MCC 129.52 3121 $1.441 $233 9% II UW I.4chad that CFA 28% 72% 202* 14.34 1.84 a 54 NB none 14)1*(0344 584 $1528 11112 51.413 804 4% -7% N 1.44100144614 CFA -2% 34% 71% 3524 1214 094 10% 55 L4203nt Inaarp:raled Rad L2B 5840 2919 $1275 III 19% .7% 9% 23% 104* At 144 2% 93 Ellin A6n 111141,11nC Rat E1H E/345 3323 $930 $88 34% -I 8% 25% 83* 11.14 244 - 57 61trn 44n tam Ons A 'brava* YIN 12414 27117 $603 It.? 2% SI CM Wind Rabat CFA 0% 20% 121% 1434 964 EN - 55 Tag Cr MOPS 9n)C440 044314344)146144 TWO 18.01 21115 WO 375 12% 8 OW MONO Nu% CF A 10% 17% -8% 1644 *6 044 - 0 *a annuli.* Ire Hateatuat WIG $24.21 8417 KW $3.1 13 N PAchad Rabat CFA 4% X% 30% 1444 1544 IA 9% co mown. In Itnglii314 1.165) 524.54 26119 809 350 21%8% N 1441100174604 CFA -1% 23% 47% 113* 1114 1.24 12% 61 Deans Hums USA. hc, Horretulke BM 11/19 21114 $561 NA II% .12 N PActnel Attu; CFA 4% 27% 135% Aix 91. 1.14 - 32 La Itn6i. ht Potrotol7v LOH 524.67 25112 086 $41 34% 64% OW MOW Rffist, CFA 5% 43% 61% BM tat 20 - 63 Caron Connone7 Ire ittlitillke GCS $20.93 2314 $449 325 10% 8% N lAchaelAthat. CFA 4% 93% 94% NA St 1.84 - 64 Nen Hone Ca, In: Potrotol7v HMV $13.98 1913 $230 308 7% -4 MOW RHINA CFA 0% 104% 229% 8334 14. 1.54 1% 65 It.mn a- Ent;n7n, n:.CbssIttlito11H HO? $1 411 $217 $3.7 a% a% N IMrod Rthat. Cf A 19% 51% MU 184 RA 17% Olsintoton Industry: DIPalt. ars — — San $340 1 14% 2% 03 34 1.5% 4 18% lit 119* 2.74 5% 93 PON C4440•41:n ROI POOL $70 7 31435 5147 11% 3% 53 34 3 8% 15% 1594 2294 1194 4% Went 5 Caulog Relall lidualh: Intrae 1 04464.3 WI — — $66511 $153 27% 17% — 10% 00 4.2 4.3% 17% 19% 1174 2644 1104 4% 67 KW Ix. RaW HMI $42.93 BIS' $1335 MB 14% .11% 4% 38 45 0.7% 6% 12% 1244 1664 293. 6% Source. J.P. Mcocal. 8lcanberg J.P.Morgan 7 EFTA01071295 Duhravko Lalcos-Bujas (1-212) 622-3601 [email protected] Global Equity Strategy and Quantitative Research 13 August 2015 Figure 14: 100 Ideas Levered to Housing Recovery Price as of as of 8112/2015 Company Ws Prloo ParlEll IPE Cortwo WNW. 14415 WNW ValuatIon 52.311 449 Tor 9ww MO*, No:Wm SON EPS Ea Covell NW 11.514% Vol 12.rot POE 41%a RE I r GE SW LW Orora WAN EWINI PE FCF GCS SWAKLOY 0/ °WV $4111wca044563444 TON *a la Cap IwO Own]. YTO 14044 AWE WW1 cki scow S. Out %WC.; 1451/ NEI AEI ME PS VW teNNIN RES Indslty 3WGIN RENO — — $8231 MI li% 4% — — It% T% 4$ 3* 22% 6% 15% 103 1114 3.111 1% f8 Mao Wol It NW HO $11749 11913 5152176 $405 46% 12% ON GYactio/ Nowt CFA 1% I% 58 42 II% 6% 19% 124x a 16.64 5% II WA Conents In NW IOW $4847 73*) NEAT LEIS 45% 1% ON [townie, 74:nn. CPA 21% 1% 51 44 43% 6% 31% 11.h *IN 0* 5% 70 OW 040 tOwoN cric NIIN tw' 144* 8341 $10327 31451) 1% .10% N °none, 7I:n4w. CPA 3)% I% 37 32 211% 4% 0% 7* II* 428 6% 71 WaanrSawws 1c NIW VCS4 WIS) 0707 37410 $810 26% 14% ON °none, 7I:n4w. CPA 76% 5% 03 40 21% 10% 18% 10* 223E 044 4% 72 REtcralto Harlon Helfros IF1414 RH 55440 KG70 534% 952 22% 4% 23% M 43 00% 25% 48% 17.E 27.2a SM 1% 73 *maxim. Ws AAN 411.15 3323 52.:31 436 41% 22% 5% El 43 - 12% 19% Inc 14.75 Its - 74 Races Fools*. CCIPINII %:430' Hy 12266 2600 1.150 120 0% 1% 2% 93 50 04% 7% 19% 87. ISE 1.74 6% Sorter Column Su • tot Sector Conswer Shpin - - $11462 4414 IT% (1% -- 3% 54 El 12% 3% 0% 13.7a 1th 344 4% No.4.:40 Poogry Ind•rhy Wnoheld Products - - MAU 01.4 21% 5% -- 11% 3% U 34 V% t% 6% 1106 Mk 7.11 4% C4 trot Guttn& Nitforiso CAM CEIBA f11.33 117 WI SIB 21% 19% 3% E 37 - Soucy F OS Swot NEWEL - 13414 1234 11% 2% - 3% SI 3/ 6.5% T% 9% 17.13 %Ix 136 5% 84n6 6 InOrsuy 8.418 - - MU 1132 15% I% - - IS% 3% St 35 02% 8% 12% 19.33 14.43 1.54 5% /6 F nt RNA. c Bps Ro(cui Boris FRC WIC ISIS 11117 WI 371( 23% ON SkocAle0401. CFA E% 2% SS 37 OA% 17% 14% NA 17.N. 2.1. 6% IlvIllo & NerIptor from. IntIssav 1104 4 11c09s96 Gnaw - - 11210 HO 16% II% -- 4% 5% Si *A 52% I% 3% 2454 1744 t3a 7% 77 RENA On. Pc craw RON 116 33 1St) 53125 WA 45% UM 11% 51 44 53% .3% .4911 MA Ilk 1A4 IS% 78 MSC %%Oros Coscralcn Crave* PTO ME 127 33715 1625 46% IT% 14% 49 39 00% 6% 6% MA ILE 3.06 14% 79 WahoSAILEco Kt Froroa Swoon VO 12402 2413 $743 169 76% 39% 2% 42 34 62% 7% 3% 92( aft Ma 9% 60 literrew. Pc. troorte MGT WE 2416 $191 525 25% 29% 5% 49 4.7 - 25% 41% NA 4.46 1.14 - Eturance Incluctlr 14."'" - - *Mt USA 35% I% -- I% 2% SI 33 42% 4% 4% 13.14 1614 1.3. 11% 61 Fry Incur Fntrcol Cpitret Iowa FAF WS) CO 41.418 5)12 SN; 10% 6% 01 35 00% 5% 11% NA 14.44 tic IS% 62 01514(4.0C WWII Caw: canna OM $1610 17113 41.116 $210 16% 14% 1% 03 43 - 1% 3% 144 14.14 SU - 63 Cwroth Fharcial ix Cua A renew WON 1.527 145 $2.646 1410 40% .38% N me/ sans,. cm 71% 1% 32 37 00% .1% .b• 144 4.4, 0.26 41% IA Sloarilittrairi. Stow Cap canto STC 41012 42.127 9902 SSA 36% KO% 2% SS 38 - 4% II% 144 LIA• 14. - LS Kitts% htutnrel1P352t. bc how. IIRTG . 11948 27/I4 $151 $11) 42% 3% . 3% 43 48 - - - NA 414 134 - RIP !slit/ IcreOwl butItInclalry 11441tEllelmodcw Tina (RIM - - $3210 MAI 9% -.I% - - I% 2% * WI OA I% I% 47. 77.42.1. 4% IS Nytnansp Cacao/ tlitrf WY $3356 37/33 515.842 $1035 .2% .14% N 703.1 twor 174 2% 46 38 39% 5% 32% 1173 Mk Lb 4% IT PArn WE Lola Canon( lc tlita PCL $11155 4609 17234 $415 0% 3% ON T(131 larcbl RE 6% 51 35 14% .1% 16% 21E 124. AN 6% 68 Anotan Hous1Roll Ciro A SinshIantawn MIN $15116 11W6 $1.312 5200 .14% .6% ON Asto%PasIsitCFA 21% 2% 41 45 — 29% 149 29E Sp 1.06 — IV Potttr Cconeticr Trettr POI 31625 4453 31421 373 45% .18% 2% 4 34 00% 9% -2% 1th 24.7, ?A -23% K. Stroto)tlowretRonSnIsfirt$.54(.1trrERSit SWAY 31505 2553 4976 514 -2% -2% I% SO 45 — 50% -151 10a1 3464 ON — II $4.0 84, With InwIeot SK/P1erEPEIT SOY 31632 WAS WS WA 1% -2% ON AdwirPatnt.CSA 23% 3% 51 30 ?A% — — 744 2/644 Us 3% 92 NurtotRN.CalaiRtooW 15%16.Fart RUT WI 117.50 91/17 VAG SIS 4% .1% 7% E 39 — — — 36.1x Nog tki — 93 AGE: Ototonc:Forenp/ SNE.Fac1( RUT IMF 11714 WM $550 114 A% .2% 11% M — SI% — — 11135 NA IAA 11% RNA WAN /.0449tmerl 8 DOntlintryt Reel Eslale Nanagarorl 8 DepWard — — $4312 22:14 11% 3% — — 16% 2% SI 42 42% 11% 20% 11(13 33.14 3* 4% E AWN /WISP URI Reel f fly POttope PLOY 34338 &WO 34328 $58.8 17% 4% ON Attowkwbw.C 4A I% 3% U 38 MO% 9% 45% 14(0 MIA 2.16 7% 56 54 .1” ClICl/5 Winter XE 317.58 23)15 31.510 SO -24% 4% IA 0) 30 MO% — -151 231.4a 705344 17. 0% 14 Tic, AGOG,. Ls/40V TRC 12311 3124 $511 $11) .13% -10% 2% 4 - - - - Oh NA 116 — 97 NOW *saws. Ix INa Era Swoop MAU $3867 4121 WI 529 33% 14% N 0sto%Paalsse.CFA .5% 4% 03 41 00% 3% 9% 4.7% DA 204 13% BS ;NNW Irc Tr/SAW Rs FM 313.9) 20,12 3415 135 -14% 14% *I 42 — 11% 46% NA *SA 06 — Seclor:Inka•340 Techmalegy — — /till $223 10% 3% A 40 LS I% 12% 1126 17.11 2.8. 4% Inlerrel Wows 6 Strelras Money InkmolSoltsvni II kakso — — SUM 317.3 WA 0% —— II% 3% 5? II 14% 14% 11% 1564 Mix 321 3% 14 24/w GaxeFOns A r.ww.flraws 2 SU 49 I4439 $3,303123 4 -14% 41% 38% )) 35 00% 43% 16%._ 744 131.14 I* — SOW* Incleilly: Wow _ — — $1.454 $353 21% It% _ — — — 54 3% SI Al 2.4% 9% 10% ISM 2134 4.7z 4% 133 FE We CorpoW RAW( Satce FICO WO 9363 12329 SISS 59% NM 4% 93 46 611 711 MI Inc nu 7.1. 5% Source: J.P. Morgan. Blomberg J.P.Morgan 8 EFTA01071296 Oubravko Lakos-Bujas (1-212) 622-3601 [email protected] Global Equity Strategy and Quantitative Research 13 August 2015 Macro Drivers: Demand, Supply, Affordability, Credit J.P.Morgan Housine Demand: firming on strong labor market (declining unemployment rate + rising wages), high consumer confidence, improving demographic trends (household formation), and low vacancy rates • The US economy has now entered its 371° month of >100k job creation. Since the start of the recovery (3Q09), the economy has created more than 11 million net jobs with the unemployment rate approaching 5%. • Wage inflation has a positive spill-over effect on consumer outlook and housing demand. The decline in the unemployment rate is likely to push real wage growth and fonvard expectations higher (Figure 16). Figure 15: 58 Straight Months of Job Creation Figure 16: Wage Inflation Now Beginning to Respond to Lower UE Since January 2008 BLS Employment Cost Index noce s 101.1 - The economy has added 3.7 milhan jobs 5M since the Man of the franclaterisis 0.1 4M al I .24 -4/4 EM -10M II III Combine enroll Change tk 3001. Monthly NoMann Payroll Change ' 030k 4% Ida - 4130k 230k Ok 400k 430k -100(B 0% 2038 2009 2)10 2011 2012 2013 2014 9315 Source: J.P. Morgan and BLS mu 2013 mu mis ECI Compensation Groat, &KAM 1204 Sense Miocene 2003 2004 2305 2008 2007 ELSMarar Hasly Earnings Groath 2008 2009 2010 2011 Source: J.P. Morgan. University of Whom. 6t.& and Bloomberg • Both University of Michigan Consumer Sentiment and Conference Board Consumer Confidence are confirming robust consumer sentiment —holding near best levels seen during this expansion. • Homeowner and rental vacancies are sharply lower. Due to the severity of the last recession and tighter credit compared to prior recoveries, rental vacancies rates have declined to the lowest levels since the mid-1980s. The homeowner vacancy rate declined to 1.8% from a peak of 2.9% as the excess foreclosure supply was initially absorbed by all-cash investors and more recently by first-time homebuyers. Figure 17: Consumer Sentiment and Confidence Strong Figure 18: Homeowner and Rental Vacancies Low Sentiment indicators encouraging Rental vacancies at lows not seen since 1985 120 12 - 10 Ikea !Vacancy 110 a nri; 100 A Rental Vacancy 2.5 • 93.1 90 \I 902 0 1%.let) L 20 ao Mchgan Consume. Sentiment 30 I C8Constmee Cenederce 20 2003 2004 2035 2003 2007 21308 2009 2010 2011 2)12 2013 2014 2015 Source: J.P. Morgan. Uniyersity &Whom. Conference Baird. and Bcomterg 6 10'91 92 `3314 95,3617 98'93 Source: J.P. lAcrgan and Census Bureau 9 EFTA01071297 Dubravko Lakos-Bujas (1-212) 622-3601 [email protected] Global Equity Strategy and Quantitative Research 13 August 2015 J.P.Morgan • Even prior to the Great Recession, the household formation trend was under pressure due to declining affordability. And after the start of the recession, this trend accelerated as the unemployment rate for 25-34 year olds surged to over 10%, Figure 20. • This resulted in a decline in headship rate with a rising percentage of 25-34 yr olds living at home with parents. As the memories of the last recession fade and the availability of jobs and rising wages improves overall confidence, this population group could be a significant driver of household formation. • Household formation remains significantly below the long-term trend with a current "deficit" of 5.2 million households. As noted by JPMorgan Economists (Rental demand continues to soar), the recent household formation trend has been more encouraging: "Household formation had been unusually weak through the first several years of the expansion, growing at only about 0.6% per year or half its pre-recession trend. But the number of households, measured as the number of occupied housing units, surged in 4Q 14 and has held a stronger trend through the latest reading. The number of households in 2Q14 was up 1.1% ar and I.4%oya." Figure 19: Headship Rate Down as Young Adults Live at Home Figure 20: Household Formation Below Trend Since 2005 25-34 yr olds Millions 20% 125 Total US Households 18% 18% 14% Lk* In Parents Household 12% 0440 10% 8% 47% .5 '91 16 16 17 18 19 110't'02D3Ili116 1:43 1)7 08 08 '10 11 '12 '13 14 15 19 *4 IS 14 /9 SI 19 11 59 14 1)9 14 Source: J.P. Morgan and BLS Source: J.P. Morgan and Census Bureau nag De Ion from trend !!!!!!!! Beloserend el formai= AhoveerendHHIonnodon • Demographics support an increase in housing demand over the next 15 years (2015-2030). A pick-up in younger cohort of the working age population (ages 25.49) as a percentage of total working population (ages 25.64) is projected by the UN, see Figure 21. We seem to be at an inflection point in housing demand since the younger cohort is more likely to drive housing formation. • Google Searches confirm similar improvement in housing trends. Based on keyword searches such as "Buying a Home", "Title Insurance", "Home Price" and "First Home", there has been a pick-up in interest for all things housing. Figure 21: Demographics Support Increased Housing Demand US population ages(25-49) I ages(25-64) projected to increase through 2030 —USPcpdalonagell25493hrsl25-54)* 74% 72% 70% 039% 86% 64% 62% CO% "§§"§§§§ilifIMA111111; Source: J.P. Morgan and UMW Nations Deparrnent of Economic and Socal Maks Figure 22: Google Searches Confirms Similar Trends in Housing yfy trend 2019 Source: J.P. Morgan and Gccgia Trends 2010 2011 2012 2013 2014 2015 10 EFTA01071298 Duhravko Lakos-Bujas (1-212)622-3601 [email protected] Global Equity Strategy and Quantitative Research 13 August 2015 J.P.Morgan Housine Sunnily: supportive with months of supply and starts/permit activity well below historical trend • Existing and New Homes for Salc and Months Supply rose for several years before peaking at 570k ('06) and 12.2 months ('09), respectively. Since the peak, however, the months supply has decreased sharply to levels seen prior to the housing boom. • New home sales lag existing home sales. Prior to 2006, new home and existing home sales grew in lockstep. However, during this recovery, homebuilders have continual to favor construction of larger homes over the $150-200k entry-level due to lower profitability of this segment. So far, this first-time buyer demand is being fulfilled by existing homes rather than new homes. Some homebuilders have responded to this demand, but due to costs (in particular land) the new home supply for entry-level housing is usually in the outskirts. Figure 23: Supply Has Tightened to Pre-Boom Levels Figure 24: Sales Recovering but New Home Sales Lagging Existing New single-family homes Single-family homes, millions 70CA - — 14 1.6 50Gt •• 12 1.4 7.0 Ensbng Home Sales 6.0 1.2 1.0 042/0 Hama le 400t far Sa Q`11) a 0.0 300k 6 0.6 COCA - 200k 4 0.4 2 0.2 100k • Ot 0 to SO*9112 ,339.116 93 97'95'999011 M113 W051)61/7 11611610 • 10 '9112 SPAS 9819*C0111/2 '031:11 06126 67 Vol '0? 10 1112131415 SOMA: J.P. Morgan. ROAN Assocaeon of Realtas and Census Bureau Source: J.P. Morgan. Mahood Asscciabco of Realtors and Census Bureau • Housing Starts and Permits have risen steadily during this recovery but the activity remains well off peak levels. However, the current housing starts remain well below long-term historical trends, especially if adjusted for growth in population or households. • During this recovery, multi-family starts have been more robust than single-family with the decline of home ownership rate. In fact, last month's strength was driven almost entirely by the multi-family segment which is currently expanding at the fastest rate at any time since 1990 while single-family starts/permits are well below historical levels. Figure 25: June Housing Starts Above Consensus... Figure 26: ...But Strength Driven by Multi-Family 000s. saar Dark = permits, light = starts 250CIt —r 2.0:0k ■1 1. 1A00k SlajeFanili 1. obi Housing Permits 1.200k 1.CCOk 90919293'91 95 93 97 99 99 90W 921k1 124.05 *C6 1:13 '0910 1112'1314 IS 931112 93 W95 SG '97 10 '93'00 '011213314 65 YAW DO '0910 11'1213141S Source:J.P. Morgan end Census Bureau Sarce:J.P. Morgan and Census Bureau 11 EFTA01071299 Duhravko Lakos-Bujas (1-212) 622-3601 [email protected] Global Equity Strategy and Quantitative Research 13 August 2015 J.P.Morgan Housine Affordability: homes still affordable compared to long-term but rising home prices and higher interest rates over last two years is pushing affordability down. Strong job market and rising wages should continue to be a support. • The Homebuyer Affordability Index has declined for all and first-time buyers over the last two years due to rising home prices and higher mortgage rates, see Figure 27. It is worth noting, however, homes remain affordable when compared to long-tom historical trend. • We believe a continued improvement in job outlook and a meaningful pick-up in wage inflation could help stabilize and potentially reverse the recent home ownership trend, Figure 28. • As shown in Figure 28, the homeownership rate has declined from recent peak of 69.2% in 2004 to the lowest level since 1967 to only 63.4% in 2Q15 as households favor renting over owning. This decline has more than unwound the increases during last decade's housing boom and brought the homeownership rate to its lowest level since 1967. Figure 27: Homebuyer Affordability Index Light = monthly, dark = 1yr avg 0 90 91 92 939415 9 97 99 991011 132 Mgt WIG 97 TS to 10 11 12'13'1415 Source: J.P. /anal and National Associafice of Renters Figure 28: Home Ownership Rate Since 1965 70% Ea% 63% 67% 66% I 65% 60% 63% at% 1916 1970 1975 1900 1965 Scurce:J.P. Morgan and Census Bureau 1900 095 2000 2006 2010 MTh • Home price appreciation has leveled off since rising double-digit in 2013, but the recent —5% yly increases in both Case-Shiller and FHFA indices remains significantly above wage growth, see Figure 29. • The increase in the ratio of median existing home price to median household income since 2012 reflects the fact that home prices are rising faster than wages — a trend that is likely not sustainable over longer time period. This metric looks worse for new single-family home prices to household income, which is near an all-time high, see Figure 42. Figure 29: Housing Prices Showing an Upward, Albeit Slower Trend Figu e 30: Declining Affordability Since 2001 Existing home sales 20% 2504 15% 10% 5% 0% 40% .15 Case-Shiner 20-City Composite 2001 2002 2009 2000 2'305 2006 2007 2009 3309 2010 2011 2012 2019 2011 2015 Source: J.P. Morgan. S&Pitase-Shiler and FHFA War Home Price gay • away. Sack • fp my 1504 1001 t0 VI '02 93 be OS 013 97 138 119 10 11 12 13 II Scurce:J.P. Mow. Census &reau and Bbcoberg 15 5.00 450 2.00 12 EFTA01071300 Dubravko Lakos-Bujas (1-212) 622-3601 [email protected] Global Equity Strategy and Quantitative Research 13 August 2015 J.P.Morgan • When adjusted for inflation, home prices remain 20-25% below previous peak levels. The Case-Shiller 20-city is 26% below and FHFA HPI is 19% below last cycle peak in home prices. • Buying vs. Renting most attractive in last 15 years. The median price to median rent ratio has declined to an all- time low of 263, compared to peak multiple of 390 and average multiple of 329. Figure 31: Home Prices Remain Far Below Peak Levels Price decline even lower after adjusting for Inflation MAW 0% .71% .14.3% NOS HPI Case-Shun 20-City .203% .30% Source: J.P. Morgan. S&PiCareiShier ana FHFA Figure 32: Home Price-to-Rent Ratio Reflects Rental Bubble Median 400 $1,200 *Wan Prke to Medial Rem 360 W.. (111 SMOG 300 $1.051 250 NSWPM WOO 200 SAO 150 3700 100 so MOO 0 6400 '00 '01 12 13 04 16 16 17 19 19 0 'II 12 13 14 15 Source:J.P. Morgan. National Assojabon of Realtors and Camas Bureau • Affordability impacted by incremental rising mortgage rates. As shown in Figure 33, 30yr fixed home mortgage rates for conventional loans have risen roughly +50bps since 2012 to 3.90% while Jumbo rates have risen by roughly +39bp to 4.29%. Every 50bp increase in mortgage rates is equivalent to a 6% increase in home prices. • Despite the pick-up in mortgage rates over the last two years, the absolute levels remain low compared to long-term average and even compared to post-recession levels. • Historically, bear flatteners are not associated with negative performance for housing stocks. As shown in Figure 35, homebuilders have outperformed the market during bear flatteners. On the contrary, bear and bull steepeners carry worse implications for homebuilder performance. underlining the importance of long rates for the housing market. Figure 33: Fixed 30Yr Home Mortgage National Average Since 1999 90% • 8.0% 7.0% t0% SO% 40% 31% Source: J.P. Morgan and Baobab Figure 34: Rising Rates Not Necessarily a Negative for Housing Homebuilder performance during rate cycles since 1991 % Maths Avg. Ann. Ret Ann Stdev IR 'Bear Flatten& 31% 4% 23% 0.11 Bear Stepener 18% -12% 21% 4.50 BJI Flatter 22% 28% 23% 1.21 BIM SEepener 28% 4% 29% 4.21 Rising 10-Ye a• 51% -13% 25% -0.53 Felling 10-Year 49% 19% 24% 0.70 Rising Shut Rates 49% -2% 22% -0.09 Feting Short Rates 51% 9% 27% 0.33 SoJrc* P. hivgai ant 81ccenberg 13 EFTA01071301 Duhravko Lakos-Bujas (1-212) 622-3601 dubravko.lakos-hujasQpmorgan.com Global Equity Strategy and Quantitative Research 13 August 2015 J.P.Morgan Household Leverage and Credit Standards: households delevered balance sheets; banks easing credit standards • Household balance sheets at best levels in more than a decade. During this recovery, households leverage has continued to decline as % of disposable income and %of GDP, see Figure 35. Also, the debt service ratio (payments as % of disposable income) is at the lowest level and still declining, see Figure 36. • The sharp decline in household debt metric is likely due to declining homeownership rate, write-down of bad mortgages, and rising disposable income. Figure 35: Total Household Debt Low, Capacity for Higher Leverage Figure 36: Household Incomes Can Support Higher Debt Payments Total Debt as % of... Payments as % of Disposable Income low and declining 150%. td 115% - 100% • Ncosehold Debt as 'b ID%potae Income 41 Household Debtas