Buying Ahead of Builders' Soft Landing

I must be crazy!

I started buying homebuilders last week when the sector was getting pummeled on a miss by American Standard(ASD Quote) and some cautious comments by NVR(NVR Quote).

I still expect a tempering in the housing market in both units and prices, but don't be a momentum moron and sell or short the sector down here!

I expect large public builders to weather a soft landing with decent fundamentals. They may grow a bit or drop a bit, but the stocks are discounting plunging conditions in sales and profits.

There were two fundamental points I discovered in my research:

A) Prices typically flatten (not plunge) after big five-year runs; and

B) total (single- and multi-family) housing starts as a percentage of domestic households are currently below the 30-year average!

If you think this sector is another tech bubble, as I have heard people mention, email me for a clue. The entire sector, with about $100 billion in sales (2006) and $8 billion in profits, trades for about $60 billion in market value. This is about 50% less than one stinking tech disaster, JDS Uniphase(JDSU Quote), which traded for about $120 billion in 2000!

This is the same position I took last year when the shares were down big. Then, everybody knew the housing world was coming to an end. Everybody was wrong. Investors made a lot of money with this contrary bet.

I will cut to the same chase. If the sector tapers or flattens, the stocks will be up big. If the housing sector implodes, the stocks will decline. My guess is, that decline will be no worse than the average stock because in the severe recession that will accompany the real estate problem, most consumption and most companies will suffer as well. However, average stocks are trading at 18 times earnings today, not six times like the builders.

There are never any sure bets in the stock market. But I like the odds on this trade.

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