New-home sales data added in this update

BOSTON (TheStreet) -- The U.S. homebuilding industry is still trying to crawl out of the biggest slump in a generation, with most analysts' forecasts calling for anemic growth beginning later this year.

Key data on the housing sector show that growth may be even further away still. The Commerce Department said new-home sales plunged 16.9% in February to a seasonally adjusted annual rate of 250,000, the worst rate since 1962.

But a few investors are placing big bets on the industry now, including Fidelity, the second-largest mutual fund company. It holds stakes in each of the industry's five biggest companies that range from 13% to almost 16% of their outstanding shares, two to three times the size of the next largest shareholder.

A slowly recovering economy after a recession and a decade of overbuilding contributed to the worst housing-market conditions in more than two decades. The industry has been hamstrung by high unemployment, low consumer confidence, tough new lending standards and banks' reluctance to lend.

>>New-Home Sales Plunged 16.9% in February

Ratings firm Standard & Poor's says that despite "challenging" market conditions, "we believe there are some signs that homebuilders could realize positive, albeit slow, growth in the second half of 2011."

Katrina Dudley, a housing industry analyst and portfolio manager at Franklin Templeton's family of Mutual Series funds, said in an interview yesterday the number of new homes being built is likely at a cyclical low and, given the nation's continued population growth, it won't remain there for long.

But when the tide will change is still an unknown, she said. A predictor of that will be steady job creation.

Daniel Kelley, who runs the Fidelity Select Construction and Housing Portfolio(FSHOX) - Get Report , said in an interview yesterday that stable prices will lead to a turnaround. Just last week, the National Association of Home Builders/Wells Fargo Housing Market Index edged up to the highest reading since May 2010. The latest data indicate that "more builders view sales conditions as good, than poor -- which hasn't been the case since April 2006," said the NAHB.

To be sure, the National Association of Realtors this week said weak sales and a rise in foreclosures pushed down February home prices to their lowest level in nearly nine years. Sales of existing homes fell 9.6% from January's pace.

And the median price of a new home is now 45% higher than that of an existing home, three times the historical rate in a healthy market. That indicates that home-resale prices are very cheap and the inventory plentiful, which also works against the demand for new homes.

Fidelity's Kelley said national homebuilders, who own a 30% market share in the highly fragmented industry, have whipped themselves into shape in the downturn, shedding inventory, cutting costs and restructuring their balance sheets, such that they're poised for immediate strong profit growth once the industry rebounds.

"It's still a challenging operating environment for homebuilders, but it seems to me that it looks brighter today than at any point in the past four years as the broader economy is starting to gain a little momentum" and consumers are regaining some degree of confidence, helped by the improving job market and stock markets' gains, he said. His fund holds all five stocks reviewed in this article, below.

The SPDR S&P Homebuilders(XHB) - Get Report exchange traded fund, which tracks the S&P Homebuilders Select Industry Index, is up 3.8% this year through March 21, in line with the gain of the S&P 500 Index. The ETF is up 11% over the past 12 months, versus the 14% gain of the index.

Here's a review of the outlook for five of the largest homebuilders in the industry:

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