Times of market turmoil often present the best buying opportunities for savvy investors. Contrarians find their best investment opportunities during times of panic. Cramer says, “No one ever made a dime panicking.” The bear market of 1974 gave Warren Buffett the opportunity to purchase a stake in the Washington Post Company (WPO). This one investment subsequently provided Buffett with more than a hundred fold return. One of Buffett's famous quotes is, "Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it."
Our innate instincts encourage us to depart a sinking ship. This survival tactic impacts the way we invest. When market panic creates opportunities to buy stock in solid companies with sound prospects, hopefully you've kept your powder dry and taken advantage. The market is clearly at an inflection point. To open a position you must have courage in your convictions. Just remember, fortune favors the bold. A market correction provides opportunity to buy great names at a discount price.
In finance, a contrarian is one who attempts to profit by investing in a manner that differs from the consensus, when the consensus opinion appears to be wrong. A contrarian believes that certain crowd behavior among investors can lead to exploitable mis-pricings in securities markets. For example, widespread pessimism about a stock can drive a price so low that it overstates the company's risks, and understates its prospects for returning to profitability. Identifying and purchasing such distressed stocks, and selling them after the company recovers, can lead to above-average gains. I believe the following housing related stocks may present such an opportunity.
Staying keenly aware of an uptrend in top U.S. homebuilder, Toll Brothers Inc. (TOL), I have recognized a steady positive uptrend since August of 2010, resulting in a 31.8% ROI over the past nine months. I have spent the better part of the last 10 years heavily involved in the new home building business. I recently interviewed Louis Espinar, a home building industry executive with 25 years of experience. Formerly with KB Home (KBH), Beazer Homes (BZH) and now president of an independent builder, Rialto Homes Inc. of Texas, Espinar states, “The Texas market is doing well, but all real estate is local and some markets are depressed. He sees changes in the banks treatment of foreclosures and mortgages “under water” as the key to revitalization of the U.S. market. My instincts tell me the banks will make the right decisions, thus making way for increased new home sales in the near future. Additionally, homebuilders have made significant changes to operating principles, enacting a “just in time” approach to new construction, which improves profit margins and cuts costs by reducing speculative builds. The days of "If you build it, they will come" are over.
Once everyone realizes Japan is on the mend, the Middle East turmoil is under control, European debt issues are being solved, and the global economic recovery continues, I see people taking advantage of the amazing values new homebuilders and banks are offering. I see homebuilder stocks regaining past glory and reaching new highs. Please review the CNBC provided chart below of Toll Brothers documenting Toll’s last twelve month stock performance.
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Here is my watch list image of 10 new homebuilder stocks and two bank stocks significantly below their 52 week highs, providing potential buying opportunities due to the possible bottoming and reversal of trend in the new home building market.
Please review the following details regarding the stocks on the above watch list. Consensus estimates were provided by Yahoo Finance. With mortgage rates and relative home prices at near 40 year lows, I believe these stocks present excellent buying opportunities heading in to the spring season. Remember, you have to buy low to sell high. I am considering starting a position in one or all of these stocks depending on the market’s reaction to current events in Libya and other news items.
Bank of America (BAC) - A financial holding company, provides banking and non-banking financial services and products to individuals, small- and middle-market businesses, large corporations, and governments in the United States and internationally. Median price target by 24 brokers is $18. High target $24.
Toll Brothers Inc. (TOL) - Engages in designing, building, marketing and arranging finance for single-family detached and attached homes in luxury residential communities in the United States. Median price target by 12 brokers is $23. High target $26.
Hovnanian Enterprises Inc. (HOV) - Engages in home building and financial services businesses in the United States. Median price target by seven brokers is $3.50. High target $4.5.
Desarrolladora Homex Sab De (HXM) - Operates as a vertically integrated home developing company principally focused on the promotion, design, development, construction and sale of entry level and middle income housing in Mexico. Median Price target by five brokers is $36.5. High target $44.
KB Home (KBH) - Constructs and sells residential homes in the United States. Median Price target by 16 brokers is $16.5. High target $21.
Lennar Corporation (LEN) - Together with its subsidiaries, operates as a homebuilder and provider of financial services in the United States. Median Price target by 16 brokers is $23. High target $28.
MDC Holdings (MDC) - Through its subsidiaries, provides home building and financial services in the United States. Median Price target by seven brokers is $29. High target $40.
Meritage Homes Corp (MTH) - Engages in designing and building single-family attached and detached homes in the southern and western United States. Median Price target by nine brokers is $27. High target $32.
NVR Inc. (NVR) - Operates as a homebuilder in the United States. Median Price target by six brokers is $840. High target $970.
Ryland Group Inc. (RYL) - Together with its subsidiaries, operates as a home building and mortgage-finance company in the United States. Median Price target by 12 brokers is $20. High target $24.
Standard Pacific Corp (SPF) - Operates as a diversified builder of single-family attached and detached homes in the United States. Median Price target by four brokers is $5. High target $6.
Wells Fargo (WFC) - Through its subsidiaries, provides retail, commercial and corporate banking services principally in the United States. Median Price target by 26 brokers is $38.5. High target $57.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in BAC, HOV, HXM, KBH, LEN, MDC, MTH, NVR, RYL, SPF, TOL, WFC over the next 72 hours.