Let's get a little greedy


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"We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful." - Warren Buffett

An uptick in the National Association of Home Builders (NAHB)/Wells Fargo housing market index (HMI) to 16 isn't exactly something to celebrate.

After all, any reading under 50 means that more builders consider building conditions to be poor than good. And while the consensus estimate of 13 for the most recent number was low by 3 points, a reading of 16 is still horrible.

The index hit a high of 78 in December of 1998 and managed to stay largely above 70 for the entirety of 1999, but it's been all downhill from there. The following chart shows the HMI index in blue - note that the scale for this metric is on the left side.

The index is a compilation of three components - sales expectations, traffic of prospective buyers, and current sales conditions. In October, all three rose. The takeaway message is that builders are becoming more confident about the future of their industry - although only marginally so.

The last time the index was at such depressed levels was in the beginning of 1991 - almost 20 years ago.

But while this index isn't suggesting homes are flying off the 'shelves', or that builders' phones are ringing off the hook, " The new-homes market is finally moving past the lull that occurred when the home buyer tax credits expired and economic growth stalled this summer," said NAHB Chief Economist David Crowe.

Mr. Crowe continued, " While challenges such as competition from foreclosures, inaccurate appraisal values, and general consumer uncertainty about the economy and job market continue to be major factors, builders have seen a slight increase in consumers who are considering a home purchase. The toughest obstacles really come down to financing - the scarcity of construction credit for builders along with tougher mortgage requirements for consumers ."

***Let me ask a simple question. Would you like to buy into one of the biggest sectors of the U.S. economy at 20 year lows?

I would. Housing typically contributes well in excess of 10 percent of U.S. total production, and home equity tends to be the largest part of a household's net worth.

Now, home values are down, households have less equity, and homebuilders see a dim, but improving, future.

Beaten down, battered, and at multi-decade lows. When would there be a better time to start increasing exposure?

***This type of situation is exactly what contrarian investors look for. They avoid the 'hot' sectors, and the high-flying stocks. Nothing seems to make investors forget about risk like a stock that is on a one way trip to the moon. But those rides never last forever...

Stocks that seem to carry higher risk - like the stock I picked up around three weeks ago in the housing industry - can actually have far less risk than flavor of the month stocks. That's because when you hit rock bottom, there's only one direction left to go.

When it appeared that the American automobile industry was dead in early 2009 Ford ( F ) was an unpopular investment. Shares sank below $2. But a year and a half later the automobile industry has staged a moderate recovery - and shares of Ford have risen seven-fold to nearly $14 per share.

Similarly, shares of Republic Airways (Nasdaq: RJET) appeared priced for bankruptcy twice in the first half of 2010 as they fell to $5.00. But as Americans take to the skies once again and the company reorganizes its business the stock has rallied more than 75 percent.

Right now housing and construction is a sector of the economy that is in even worse shape than the U.S. automobile industry, or the airline industry. In fact, this sector is widely believed to have caused the worst recession since the 1930's.

But I love shopping in the discount isle - where everything is going for fire-sale prices and the bad news is already priced in.

I'm going to be honest with you - things can always get worse. So while I'm recommending this contrarian investment in the housing and construction industry, it's not for everybody.

But that's what a contrarian investment is all about. Be greedy when others are fearful.

That said - we're not walking into this investment without a plan. I believe the stock's upside potential far outweighs the downside risk at this point. Soon more investors will realize that this company isn't completely dependent on a housing recovery. Instead, growth will come from selling energy technology and adding value to low cost energy sources like coal.

If you're comfortable being "greedy when others are fearful" than I encourage you to click here, take a trial subscription to Small Cap Investor PRO and read my research report on this stock.

Subscribers are currently up around 10 percent - but I believe shares could double in the next 12 months as the economy continues to improve.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Stocks

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