Monday, December 12, 2011

Is Residential Housing Ready for a Rebound?

CNBC: Residential Housing Ready to Awaken?

There are some signs single-family housing is rebounding, as the above article suggest, but there are still mixed signals.

Buffett said back in November that residential construction was still essentially in not just a recession but a depression.

So some caution seems wise at this time when it comes to housing related stocks.

Yet, attempting to optimally time stock purchases is one of those great ideas in theory only.

As always, for me it's the quality of the business franchise and, considering long-term effects, the margin of safety that determines when to buy. It's never the macro environment.

So with near term or even medium term expectations should probably be tempered for stocks in the housing related sector. To me, it doesn't make much sense trying to guess when things will finally improve.

I sure can't figure that kind of thing out.

The big question, of course, is which stock or stocks in or related to the sector is best to own long-term. My solution has been to own the housing and construction related businesses that displayed the greatest resilience throughout the crisis. Unfortunately, the two I like, Lowe's (LOW) and Mohawk Industries (MHK) are selling well above the maximum price I'd be willing to pay.*

Both stocks were below that max price only a couple months ago (each stock has rallied some 30% plus from those recent lows). Of course, with markets as volatile as they have been, it's certainly possible I'll get a chance to add some more shares.

As always, I like to accumulate enough shares of something when the discount to value is very substantial and obvious.

The macro environment will develop, in fits and starts, at its own unpredictable pace.

There's always the chance, after making a purchase, that the stock price goes even lower (possibly even for an extended period). Knowing this, if shares of a very good business are attractively priced, my preference is to still establish a meaningful position. I just leave room in the portfolio to accumulate more if what seems cheap gets even cheaper.**

If the value of something goes down, it's a problem. If the price goes down, it's not.

"There's no reason we should become fearful if a stock goes down. If a stock goes down 50%, I'd look forward to it. In fact, I would offer you a significant sum of money if you could give me the opportunity for all of my stocks to go down 50% over the next month." - Warren Buffett, 2008 Berkshire Hathaway shareholder meeting

Buffett advice: Buy smart...and low

In the near or medium term, the stock price of a good business that continues to go down and down is an advantage not a problem.

What matters, in the long run, is if the expected growth in intrinsic valuation has been judged reasonably well, and a proper discount considering the specific risks has been paid.

The ability to judge value is crucial but, otherwise, the accumulation process is more about conviction, patience, and discipline than IQ.

Figuring out how market price compares to value isn't easy but, with some work, doable. Getting the timing right, isn't.

At least not on a consistent basis.

When the skies clear the discounts are usually long gone.

Adam

Established long positions in LOW and MHK at much lower than recent market prices.

Related posts:
A Housing Stock Not Reliant on a Big Recovery
Lowe's and Home Depot
Lowe's Shareholder-Friendly Buyback Plan

* As noted in Stocks To Watch
** Seeing a stock go down in price temporarily might be annoying (permanent capital loss because of misjudged value is another story, of course), but if the investor doesn't sell nothing is lost. Consider the opposite, that the stock an investor likes unexpectedly rallies before a meaningful position is built? Owning just a few shares when many shares were wanted is far more annoying. Those missed gains on the stock or stocks an investor feels the most strongly about have a very real impact on a portfolio in the long-run. For most investors, there are only so many stocks that come along where the conviction level is substantial. When it occurs substantial amounts should be accumulated.
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