July 29th, 2008
I’ve been asked several times whether I still believe that homebuilders might be on the mend and whether any of them would be good long-term investments. Actually, I first wrote about that on March 15, when the S&P 500 began its last recovery attempt (emphasis added here):
When it comes to the stock market, the health of the market trumps rising industry group ranking so it’s these stocks should not be bought now. If you were to do a Google search of this blog for “homebuilders” you’d see I wrote negatively about the group over 6 times in 2005-6. But times and valuations have changed. Homebuilders are down over 60% from their 2005 peaks. So when the market signals that it has stopped declining, perhaps the devastated homebuilders, may be one of the groups first to respond.
It takes a long time for bases to be built and many of the stocks in the group, rather than building houses are now building bases. I’ll be watching this and screening individual homebuilders for good base patterns and, later, for breakouts.
The answer now is that 1) the market isn’t yet ready and 2) the industry isn’t ready. The stocks of some of the larger homebuilders look as if they’re still working on base-building but they’re nowhere near an upside breakout (nor do those it look like a downside break is eminent either). So the clear answer is that any purchase right now would still be highly risky.
Also, I mentioned in a later entry (July 15) that the health care Industry Groups may be early out of the gate on a bottom turnaround. As a matter of fact, two of the eight stocks mentioned there recently received acquisitions proposals at prices substantially above the July 15 price. The remaining six still look like timely purchases now.
But another area that appears to be developing as a fertile ground for buying opportunities are the various Software-related Industry Groups. I don’t have time to include graphs tonight but I recommend that you scan the stock charts for these companies and not how well they’re holding up in the current negative environment. Many are actually approaching their recent previous highs. I’ll try to get back to doing a more in depth analysis of some of them soon but here are the names for now: