David Tepper Bets on Home Builders, Should You

May 31, 2011
J. Webster
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David Tepper, the legendary Appaloosa Management hedge fund guru, has made a big bet on home builders, just when these stocks are perhaps most hated.  He did the same with the bank stocks bank in 2009, at the nadir of the collapse of the stock market, which turned out to be an ingenious investment. Buying stocks that are hated is something that Warren Buffett favors as well.  It does take some guts though to step in and buy the home builders, especially when they are now talking of a double dip in the housing market. Tepper bought these home builders mentioned below:

US consumers remain too afraid and poor to buy, lenders are unwillingly to relax their standards, and a glut of supply from foreclosed properties hang over the market.

Home builder stocks, predictably, have done horribly.  Since May 2006, KB Home (NYSE:KBH) lost 81 percent, DR Horton (NYSE:DHI) 60 percent, PulteGroup (NYSE:PHM) 78 percent, and Beazer Homes (NYSE:BZH) 93 percent.

This does seem like a very interesting contrarian investment thesis. However, how long will you have to wait before you see these stocks ramp up?

What could make this wait bearable though, or at least manageable, is a few of these stocks pay dividends, so you’ll get paid to wait. Another thing that makes a bet on the home builders somewhat comfortable, is there is a big risk reward since they are so low and these aren’t necessarily high flyers or risky stocks with an unknown aspect to them – meaning you know what they do, they build homes. They’re not technology stocks or biotech stocks without a clear business model or means of generating revenue.

Whereas for home builders, everyone needs and wants a new home.  In the long run these stocks will recover.  However, which ones?  There will be some consolidation and some that don’t make and some that are completely different companies in 2, 5, or 10 years. Which ones do you choose for your stock portfolio, some or none?

Source: IBI Times

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