as part of our
A smart investor recognizes that the market is a forward-looking
beast. He also knows that the market regularly scales "walls of
worry," and that prices rise before everyone realizes a recovery is
The average investor? Well, he sits on the sidelines and, in
turn, misses out on significant profits.
Don't believe me? Look no further than the real estate sector
Be Greedy When Others Are Fearful
Back in February
, when I predicted the real estate market hit rock bottom, my inbox
overflowed with venom for making such a preposterous claim.
Hundreds of readers unsubscribed, too.
Of course, homebuilding stocks were already telegraphing a
recovery. But nobody wanted to believe it because home prices were
still falling across the country. They let the "wall of worry"
blind them from the opportunity.
As I wrote at the time, though, "prices are going to be the last
thing to bottom out." Well, they just officially did.
The latest reading of the Case-Shiller House Price Index went
positive on a year-over-year basis for the first time in 21
Now that people can finally see the real estate recovery,
they're starting to believe it, too. It's not just investors,
either. It's the mainstream press.
Case in point: Mentions of the phrase "Housing Recovery" in news
articles went completely vertical this summer. Take a look:
The only problem? Those who were waiting to see it to believe it
lost out on killer profits.
More specifically, average investors who waited for real estate
prices to actually increase - instead of acting when homebuilding
stocks bottomed out in October 2011 - missed out on profits of
I guess Warren Buffett was on to something when he said it pays
to be greedy when others are fearful, huh?
Double-Digit Upside Remains…
Rest assured, the purpose of today's column isn't to scold
anyone for being average instead of smart. Truth is, I'm no stock
market Einstein. It took almost five months of rallying by
homebuilding stocks for me to wise up to the opportunity. So I'm
only slightly better than average on this one.
Instead, I want to encourage you to invest in the recovery
before it's too late. Especially since the latest data points
indicate the recovery's gaining steam.
Take the National Association of Home Builders/Wells Fargo
Housing Market Index, for instance. It rose for the fifth straight
month to its highest level since June 2006.
This Index happens to be a reliable leading indicator of
single-family housing starts. Take a look:
And wouldn't you know it? Yesterday's report from the Commerce
Department revealed single-family housing starts rose 5.5%, to a
rate of 535,000 homes - the fastest pace since April 2010.
As you can see, though, a huge gap still exists between the two
data sets, indicating that an even more sizeable increase in
housing starts is imminent.
Translation: The recovery should pick up steam in the coming
months. Especially in the wake of the Fed's decision to keep
mortgage rates low.
I'm not the only one who expects the real estate recovery to
) issued a note to clients saying, "Our confidence in our forecast
for a 20% to 30% housing activity growth for each of the next few
years has risen."
Goldman's favorite homebuilding stocks are
So, how do we play it? I'm convinced that spreading our bets is
the smartest strategy at this stage in the recovery. By that, I
mean investing in an ETF that gives us exposure to multiple
homebuilders at the same time, instead of trying to focus on one or
two homebuilders like Goldman suggests.
We have two options: the
SPDR Homebuilders ETF
(XHB) and the
iShares Dow Jones Home Construction ETF
). I favor the latter because it gives us more direct exposure to a
real estate rebound.
How so? Well, six of the top 10 holdings in ITB are homebuilding
stocks, whereas XHB only includes two in its top 10. And in terms
of the total portfolio, 85.6% of the Dow Jones Home Construction
ETF is invested in homebuilders and building materials stocks. The
SPDR Homebuilders ETF only has 56% of such exposure.
Long story short, ITB is a purer play. Accordingly, it's
rewarding investors with higher returns. Case in point: Over the
last six months, ITB is up 30%, nearly doubling the returns of
Bottom line: The time to be a smart investor in the real estate
recovery has passed. But all the profits have not. So don't be
dumb. Now that you can see it, believe it. And then invest in