Building Stakes in Homebuilders

The market zoomed up on Friday, partly as the result of a tweet that seemed to indicate Russia was seeking to de-escalate the crisis in Ukraine. Given how many stops and starts this unfolding situation has already had, I would take any news of this sort with more than a pinch of salt. What the big rally Friday did show is how significant geopolitical concerns are right now as a headwind to equities. Earnings season is mostly over. We get some more economic reports this week, including monthly retail sales, July industrial production and consumer confidence measures. However, I believe the market is mostly directionless here -- and is likely to be so for a while. I continue to add incrementally to core holdings on any dips in the market, as I outlined last week. I don't think any major moves are warranted at the present time. However, I am always on the lookout for actionable themes in out-of-favor sectors. I am continuing to slowly increase my exposure to the domestic housing market, as many names are offering good long-term value, after selling over the last month or two on signs that housing seems to be stalling recently. I believe the stall in the residential housing market is probably temporary. Household formation has been significantly above housing starts over the past half dozen years and the recent decline in interest rates has brought already low mortgage rates down even further. In early July I highlighted my first initial foray into this sector as I profiled my recent purchases of Realogy Holdings (RLGY), the nation's largest residential brokerage and UCP Inc. (UCP), a small Northern California builder with deeply undervalued assets. Today, we will look at another home builder whose primary business is in California and Colorado. I am building a stake in homebuilder TRI Pointe Homes (TPH). The company reported stellar earnings last week that saw it easily exceed top and bottom line expectations. It is the fourth straight quarter the company has stepped nicely over estimates. Despite this, the stock was down by the end of the week, as sentiment on homebuilders continues to be weak. However, long term investors should look past the current negative outlook on the sector. TRI Pointe is tracking to double earnings from 2013 this year, and should post profit of around $1 a share. Analysts have another 30% increase penciled in for FY2015. Order backlog growth is showing strength, and the company has a solid balance sheet. The stock is cheap at 10x next year's expected EPS and a five-year projected PEG significantly below 1 (0.53). The stock is near 52-week lows and offering a great long-term entry point for patient investors. I don't expect the housing market or the homebuilding plays to turn around on a dime. Thus, I am making incremental additions in a variety and expanding number of housing plays every time the overall market provides a dip to buy. I have no strong feeling on whether this strategy will pay off over the next three months, but have a strong conviction that a year from now these forays will provide significant profits to my portfolio. My friend, who is a lifelong contrarian investor, once shared with me an observation regarding his investing style which he described as always early, rarely wrong. It is a motto an investor that is willing to go against the herd should embrace.

Building Stakes in Homebuilders

The stall in the residential housing market is probably temporary.

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Very good quarterly numbers from Bassett Furniture (BSET)

First Half Results - Putrid Second Half Results - Likely to Be Much Better

We Should Be in for Better Starting Soon

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