I must be crazy!

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

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), 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.

Click here for larger image.

Click here for larger image.
Robert Marcin is the founder of Defiance Asset Management, a private investment management firm. Client accounts managed by Defiance Asset Management often buy and sell securities that are the subject of writings by Marcin, both before and after the writings are posted. Under no circumstances does this column represent a recommendation to buy or sell stocks. This column is intended to provide insight into the financial services industry and is not a solicitation of any kind. Neither Marcin nor Defiance Asset Management can provide investment advice or respond to individual requests for recommendations. However, Marcin appreciates your feedback; click here to send him an email. Marcin is not required to update or held responsible for updating any portion of this column in response to events that may transpire subsequent to its original publication date.

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