Today's Best and Worst Small Caps (and why): CENX, MHO, MTH, Aluminum, Homebuilding

Just to be clear, there's a good chance some of the big movers from the small cap world today may be rolling simply due to a little volatility. Or, these dips and surges may be an important hint of what's to come. Either way, you can't afford to not at least find out why small cap aluminum stocks are up 7.8% today while small cap homebuilding stocks are down 3.7%.

Small Cap Aluminum

When I say small cap aluminum stocks are up 7.8% today, what I really mean is small cap aluminum stock. There's only one true small cap (S&P 600) aluminum play - Century Aluminum Inc, (CENX) -  and it's up 7.8% today.....it is the S&P 600 Aluminum Index. (And if it rings a bell, it's because I looked at the entire industry in a bullish light a couple of weeks ago.)

Why is it up? No particular reason... no news, nor even a rumor. I think it's up today simply because it was needlessly blasted after I mentioned it on the 7th. Figures. Still, the market eventually gets the price right. That's what I think is going on today... the market's thinking about the company's future and not consumed by its past.

Longevity to the trend? Yes, I think there will be. Go back to the original article to fully understand my reasoning. However, I don't expect any less volatility going forward.

Small Cap Homebuilding

Do I even need to say it? New home construction fell 12% in April, while new building permits issued came in at record low levels. The real estate implosion may be stabilizing, but it's far from over.

On that note though, there are a couple of nuances worth keeping in your back pocket. Single-family home construction (the biggest piece of the housing pie) was actually up a hair in April. Multi-family home construction (the smaller segment of the market) saw new construction fall by more than 40% last month.... there are just a ton of multi-family homes flooding the marketplace. That may or may not have some bearing on the future success of a particular homebuilder you follow, though in my experience the stocks in the group tend to move as a herd without regard to a single or multi-family focus.

Two of the bigger small cap losers caught in today's storm include Meritage Homes Corp. (MTH) and M/I Homes Inc. (MHO). 

But is there any longevity to today's weakness? Yeah, I think there is.

Frankly, I'm surprised the group was able to rally at all over the last several weeks. What the market still doesn't seem to quite grasp is that even if new construction ramps up to 2007's levels, there's still more supply than demand (in terms of real estate as well as the number of homebuilders we need). A few more of these companies need to fall by the wayside to push the 'supply' end of the equation down.

Will that mean Meritage and M/I Homes are going away? I think it's too soon to make that call, though I think all the homebuilding stocks will suffer in the meantime before housing makes its expected bottom in the second half of the year.

As evidence of their broad plight (with or without the market's recovery), I submit to you today's big reason MHO is leading the group lower - the company is issuing 4 million shares to raise  for 'general corporate purposes'. Seriously? Come on guys, let's call a spade a spade - you're fighting for survival, and even if construction demand picks up, will 4 million shares worth of funds produce a positive ROI? Doubtful.

Bigger picture, where there's smoke there's fire. If M/I Homes is raising funds through equity, odds are that other homebuilders need to, and just haven't yet.

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