Masters Series: How We Safely Made 90% Gains in Homebuilder Stocks
Editor's note: Cheap... hated... and in an uptrend.
Regular readers know that's Steve Sjuggerud's investing mantra. And as someone with two decades of experience in finance, Steve knows a thing or two about the markets.
In today's edition of our weekend Masters Series – originally published in the True Wealth Systems (TWS) Handbook – Steve shows how his seemingly straightforward investment philosophy led his subscribers to safe 90% gains...
How We Safely Made 90% Gains in Homebuilder Stocks
My TWS computers flashed a "buy" signal on U.S. homebuilders in December 2011. To say it was a difficult trade to make would be an understatement...
You see, homebuilder stocks in late 2011 were a near-perfect example of a "bad to less bad" opportunity.
At the time, these stocks had gone straight down for five years. The iShares U.S. Home Construction Fund (ITB) fell more than 80% from its launch in 2006 through late 2011. Of course, that gave us a great chance to buy...
Homebuilders checked all the boxes we look for in "bad to less bad" trading. They were cheap, trading below long-term valuations. Sentiment was extremely negative. Investors hated them. And lastly, they had just begun moving higher. Let's look at each piece, one by one...
First, homebuilders were dirt cheap. Of course, their long-term value doesn't change much over short periods. But the market price can change dramatically. It did, and that gave us an opportunity.
In this case, we had a chance to buy near record-low prices in late 2011. Take a look...
This chart shows the price-to-book value for the homebuilder industry. Book value is a rough measure of liquidation value. As you can see, book value fell more than 50% from 2005 to 2011.
The incredible value we saw in homebuilders wasn't surprising. It's common in the "bad to less bad" trades we look for in TWS.
It works the same for sentiment...
In late 2011, buying homebuilding stocks was about as contrarian a bet as you could make. No one was interested in buying. And that gave us a great opportunity.
The easiest way to see the negative sentiment is with the National Association of Home Builders ("NAHB") Market Index... a survey that shows how optimistic or pessimistic actual builders are right now. Take a look...
A reading below 50 shows a negative outlook. In late 2011, the index was below 20... and barely above its all-time low.
In short, no one wanted to buy homebuilders back then. Most folks thought the housing market was dead... for good. After the steep decline these stocks suffered, no one was interested. It was the ultimate contrarian trade. But it gave us a great chance to step in and buy.
Of course, we had to wait for the last piece of our investment strategy... an uptrend.
As I'm sure you know, we never want to buy as an asset crashes. We want to buy after it has already fallen. It's dangerous to try to catch a falling knife, as the saying goes. And cheap stocks can always get cheaper.
We use prices to find out when an uptrend begins. And that's a major key to how all of our TWS investment systems work.
In the case of homebuilders, we had cheap and hated... We just had to wait on prices to move in our direction. By late 2011, we were ready to buy...
The chart above shows shares of the iShares U.S. Home Construction Fund (ITB) – our preferred way to buy homebuilder stocks.
You can see that prices fell in mid-2011. They then flatlined and began rising. That was the start of the uptrend.
On December 6, we bought shares. And just 19 months later, we closed the position for a 90% gain.
This trade is a perfect example of "bad to less bad" trading... and the cheap, hated, and in-an-uptrend investments we look for in True Wealth Systems.
We had great value and negative sentiment. But we waited for prices to move up. Sure, we missed the first few percent of the big move. But waiting gave us safety. Instead of buying on the way down, we bought after the bottom had passed. And in this example, it led to a safe 90% gain.
Because we often buy assets that are out of favor, these are the "tough" trades to make. But they're also the right trades to make. After all, if it wasn't hard, we wouldn't be able to capture triple-digit winners, safely, by using this strategy.
This is just one simple example. But it shows how we think – and how we invest – in TWS.
Again, I call TWS my life's work because we built it to look at the things I look at and to think the way I think. In this example, it did just that. And I expect it to continue working the same way going forward.
Good investing,
Steve Sjuggerud
Editor's note: Steve spent years and nearly $1 million developing and back-testing his True Wealth Systems computer system. Every day, the TWS team – which includes two PhDs and an actuarial scientist – uses it to sift through huge amounts of data looking for safe ways to profit... regardless of what the market is doing.
It's no wonder why True Wealth Systems subscribers have booked gains of 324% on health care stocks... 184% on biotech stocks... 101% on U.S. stocks... and 121% and 105% on a pair of bank warrants... to name a few.
Learn more about True Wealth Systems – and how to take advantage of a special, limited-time offer – right here.