2008-03-29

Home Builder and Financial Stocks, Take Two

Last week, we talked about how a “Recession May Be Good News For Home Builder and Financial Stocks,” based on data reported in a column in SmartMoney. Well, a second personal-finance magazine has weighed in similarly. The April 2008 issue of Money included an article titled, “Junked Stocks That Could Fly Again.”

Does the weighty authority of two magazines mean we should rush out and buy stocks in these industries? Well, rushing out and doing anything based just on a magazine (or even two) is probably not the best approach. (And I attest to this from having done it.) But I agree, correctly or incorrectly, with the opening premise of the Money article:

The time to make money in the stock market is not when things are going gangbusters, but when things look as if they are going bust. Just ask anyone who invested in beaten-down U.S. stocks after the market sank in the immediate aftermath of 9/11. [¶] Well, such a time may be here again.


Trying to get into stocks when they’re down is more sophisticated investing—and a lot riskier. So it’s not for everyone. But thinking about it or trying to understand it could be interesting or instructive. At least for me, since I’m no good at it. I have the stomach for it but not the brains—a bad combination.

On financial stocks, the article notes they have lost about 25% of their value with the subprime mess—about 9% more than the market overall. But there are two reasons why they could bounce back. First, the article points to historical data that says, when the Fed starts cutting rates, financial stocks go up over the course of the following twelve months. A lot. 14.6% overall and 19.2% in non-recession years. Unfortunately, the article does not parse out the gains in recession years! The article also likes the dividends you get on financial stocks—averaging about 3.2%, compared to 2% for the S&P 500. Among specific securities, the article likes Merrill Lynch (MER), Wachovia (WB), and KBW Regional Bank ETF (KRE).

On home builder stocks, the article essentially seems to be saying that they’ve beaten down too far—actually summing up with, “some think they’re due for a bounce back.” Hmmm. This was rather less convincing to me. I know the past doesn’t predict the future, but I’m still more interested in reading data on the past than reading that a stock (or a sector) is “due.” The article does suggest the bounce back may have started, with home builder stocks up about 38% over the past month.

We haven’t done anything with financials or home builders recently—haven’t bought anything new or tried to dump anything we already have. I’m kind of interested in financial stocks. I’m still feeling kind of wary of home builder stocks though. We have a little bit of one home builder (which is more or less taking a bath relative to when we bought it); and given our other holdings in real estate or real-estate-related securities, I’m not feeling any urge to gamble further in this sector (and I guess it does feel like gambling).

With how busy we are right now, chances are that we won’t do anything soon—for better or worse.

For the full read of the article, check it out: “Junked Stocks That Could Fly Again.” It also discusses REITs.

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