Best Stock to Profit from the Housing Recovery

September 29, 2009

The housing market was one of the hardest hit industries of the last year. We’ve seen homebuilders and construction companies literally stopped in their tracks by the steep declines in the sector. Half constructed homes and office buildings have been a reality of the post financial crisis market.

But now, as investors start to feel more optimistic about the market and start looking to make back their money, they’re looking for bargains in industries that have suffered the biggest declines. Housing certainly tops that list.

So is it a good move to buy housing, construction and materials stocks again?

Many of you have emailed me recently and asked me this very question. Some of you wonder if now is the time to snatch up housing companies at bargain prices, and others are wondering if it’s too risky to jump back into related stocks yet. In general I must admit that housing-related stocks are a pretty poor lot—but painting the entire industry with a broad brush is a bad idea. You can overlook tremendous profit opportunities, or you can fool yourself into buying a bad stock just because it is in a good sector.

That’s where earnings come in. These are cold, hard facts that make it clear which stocks are good investments and which ones aren’t worth your time and money.

Let me show you what I mean by comparing the recent earnings of two housing stocks and explaining what makes one good and the other bad: home builder Toll Brothers (TOL) and building products supplier Eagle Materials (EXP). You may be surprised with what we find.

Let’s see how they stack up:

Housing Market Still Hurting

First, some background: Just this week, the latest FHA numbers were released and show home prices fell 4.2% in the latest month compared with July 2008, and are down 10.5% from the peak in April 2007. And that’s just the average. In my home state of Nevada, the Las Vegas metro area is faring much worse. In August, the median sales price in this metro area was down a jaw-dropping 46% compared with 2008. It’s no surprise why—68.4% of the existing home sales in the Las Vegas area were foreclosure resales in the last month.

There are no two ways about it: The housing market is still hurting. With high unemployment, uncertainty is high. That means consumers are unwilling to buy a new TV let alone a new house. And in the wake of the credit crisis, foreclosed homes continue to create a huge supply of properties for sale while demand remains weak.

But I’m not interested in how far we’ve fallen since the peak of the real estate boom. I’m interested in how much the market has to climb in the months ahead. After all, the name of the game is to buy low and sell high.

This is the difference between my market-beating philosophy and those negative traders on Wall Street: Instead of focusing on negative comparisons to the previous bull market, I’m focusing on the profit opportunities emerging right now. And the fact of the matter is that after a long race to the bottom over the past 18 months, the housing market will eventually turn around and provide huge profit opportunities during the recovery.

Now, let’s focus on two individual stocks to highlight the current conditions and the potential for future growth: home builder Toll Brothers (TOL) and building products supplier Eagle Materials (EXP).