It’s Still Possible to Make Money with Homebuilders

Four years after the worst home price crash in memory, the rental market continues to outdo the new home market. But that doesn’t mean there isn’t money to be made with homebuilders.

Often, when a particular industry or sector is grossly out of favor there’s an overreaction in stock selling. Homebuilders’ stocks certainly fall into this category. The SPDR S&P Homebuilders ETF (NYSE: XHB) lost a full 83% in the three years between April 2006 and 2009.

Since bottoming in March 2009, this homebuilders’ performance proxy has tripled, moving up from roughly $8 to $24. But it would have taken some serious brass, and a ton of antacids, to capture these gains. Do you really think you could have pulled the trigger on BUYING homebuilders in early 2009?

Opportunistic investors could have capitalized on homebuilders’ recovery by taking targeted bets. Here’s a chart of XHB. The colored bars show time periods in which we would have held shares if we had made tactical buys, following a simple system that buys homebuilders when they begin outperforming the S&P 500.

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The green bars represent profitable trades. As you can see, this system would have given us winners on five out of six trades. By putting $10,000 to work on each trade, this system generated a total profit of 53% since 2009, just on this one ETF.

The best part is, we can limit our exposure to the market (and volatility) by taking this sniper-like approach. These gains came from being “long” just 42% of the time. During all those gut-wrenching downturnrns… we would have been “in cash.” That’s because this isn’t a “Buy and Hold” strategy. It’s a “Buy and Sell” strategy.

By comparing the performance of an out-of-favor industry against the broad market, I can determine when the industry is heating up and gaining momentum. After picking up steam, I usually see the outperformance continue for another two to three months – long enough to get in, get out and get on to another opportunity.

It might be too early to like homebuilders for the long-haul. But you don’t have to like them for the long-haul to still make some money in the short-term.

If you haven’t done so already read the Survive & Prosper issue on “The Opportunity in Housing Market is NOT a House.”