Time to Buy the Homebuilders -- Carefully
>>>See especially the graphic comparing Price/Book 1990 and now. I ain't buying because in 1990 there was no severe recession - such as we have just entered. You know - the elephant in the living room.<<<
January 18, 2008
One of the wisest investors I know has been busy … buying U.S. homebuilders.
The Gray Bear, as I call him, is a publicity-shy portfolio manager in London with a wonderful track record going back to the crash of 1973. He was buying gold at $255 an ounce back in 1999, when nobody wanted to know, and Japanese equities near the bottom a few years later. (He also sold Japan in 2005, when everyone else piled in).
His latest big contrarian bet, on the stricken homebuilding sector, has a simple rationale. It's a durable asset class that has already fallen more than 70% from the peak. On the stock market, in other words, the crash is nearly over.
"U.S. homebuilding stocks seem an attractive asset class on a, say, three-five year view," he wrote in a recent note to clients. It's "a reasonable asset class (they will go on building houses) which is down over 70%. To the best recollection of my (endless) studies 70% off the top gives a massively positive probability of substantial profit within 3 years."
This, I should add, is from a deeply cautious investor who is still very gloomy about the economy and the market.
He's probably right about the sector. And that makes an interesting case for dipping into the Dow Jones U.S. Home Construction iShare or the S&P Homebuilders SPDR. Both are low-cost exchange-traded funds that track the industry, a safer and easier way to invest than trying to pick individual stocks.
Caveat: Remember there will be plenty of volatility ahead. We can expect some homebuilders to go bankrupt and for bad news to last for a long time.
The Gray Bear's strategy: Work out in advance how much you are willing to risk. Divide it by three. Invest each tranche at intervals of several months.
And remember there is no such thing as a sure thing. You can only ever bet on the balance of probabilities.
Nonetheless, consider the case of two bubbles. The tech mania peaked when the Nasdaq touched 5049 in early March 2000. Over the following two years and seven months it plunged 78% until it finally bottomed out at 1114 in October, 2002.
If you gritted your teeth and invested then you have more than doubled your money.
The real estate bubble on Wall Street, as measured by the Dow Jones Wilshire U.S. Home Construction Index peaked in July 2005. Over the following two years and six months it plunged 77% before touching a fresh low on Jan. 9.
Does the suggestion that you start buying homebuilders make your jaw drop?
I hope so. The best contrarian bets always do.
Yes, the real estate crisis could play itself out on Main Street for another year, two, or even more.
But that alone doesn't make homebuilding shares on Wall Street a poor investment. It simply depends on the price you pay for them
Investing is frequently counterintuitive. Many investors felt "safe" buying homebuilding stocks back in 2005 because the industry was booming and everyone else was investing too.
On Wall Street, there is no safety in numbers. Quite the reverse. The market tends to pay too much for shares when things are going well -- and sell them for too little when they are going badly.
On a number of long-term measures, many homebuilding shares now look pretty cheap. They now trade at historic discounts to book or net asset values, and to annual sales. Our table shows the price-to-book-value of five leading homebuilding shares, and compares them to the lowest levels reached at the nadir of the real estate crash of 1990.
These shares were trading at huge multiples of their book values when the bubble was at the peak.
Of course sales may fall and book values be written down. You can even consider it likely. But that's why you want to buy shares cheap. That would account for these discounts.
It would be nice if Wall Street would sell us shares cheaply when things are booming, but markets, alas, are not so obliging. It requires patience, discipline and a lot of nerves to buy when the outlook seems terrible, but that's the only time the shares are cheap.
Write to Brett Arends at brett.arends@wsj.com |
