"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
Stocks that seem to carry higher risk - like the stock I picked
up around three weeks ago in the housing industry - can actually
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
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
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
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
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