Jeremy Siegel, one of Wall Street’s best investment minds, said that, “Some of the most successful investments of the last thirty years have come from industries whose performances have been utterly horrendous.”

And if ever there was a horrendous market, housing’s it. The housing industry has sunk almost 40% this year, sending most investors heading for the hills…but not all…

There’s a niche in the housing market that’s actually been doing quite well over the last month, returning 36.4% when the S&P was fighting off some of the worst losses in history.

Putting the Fab in Prefab

Prefab manufactured housing has been making a comeback in spades. The industry has been growing at a steady clip for one obvious reason: in today’s credit crunched economy, people are looking for low-cost means to home ownership.

Prefab manufactured housing is the sector of the housing market that includes things like trailers and RVs, as well as higher end modular homes that are built off-site and put together at the construction site. The beauty of these kinds of homes is the low purchase cost for consumers.

Because prefab homes are so much less expensive to build in a factory setting than a traditional home at a construction site, they’re becoming a welcome alternative for those who don’t have the money to pony up for a custom-built home.

And why shouldn’t consumers love prefab homes? From a quality standpoint, there’s almost no difference between a completed prefab home and a custom-built one. According to an article in BusinessWeek, “Thanks to style-conscious architects, today’s manufactured houses prove you can combine low cost and high design — and they’re selling well.”

Many people see the prefab world as the future of the housing industry — imagine, putting up a home in 2-4 weeks at a fraction of the cost of building from scratch. The trend’s an impressive one…

Like most, I grew up familiar with traditional construction. You can imagine what a surprise it was then to find that back in my home town, a new house had been constructed in just a couple of weeks in the neighborhood my parents live in. “It’s one of those modular homes,” explained my father when he noticed the confusion on my face as we drove by.

The most impressive part about the modular home phenomenon is the fact that these houses don’t look any different from any other house you’ve ever seen. They don’t feature any fewer amenities. But they do have marked advantages. Sounds like a stock play to me…

Prefab Performance

Prefab homes are a small niche with only a handful of stocks. But just look at the numbers, and there’s no question about the potency of prefab. 83% of companies in the industry saw returns in the last four weeks — almost half of which were in the double digits.

Skyline Corp (SKY: NYSE) and Champion Enterprises (CHB: NYSE) are a couple of examples of small-cap prefab home companies that saw nice returns in September. In fact, small-caps rule the roost in the prefab arena…most companies have market caps between $33M and $450M, making them an interesting play for penny stock investors.

As prefab homes catch more and more attention from real estate developers and consumers, you can bet that this trend will keep going strong.

Cheers,
Jonas Elmerraji

November 12, 2008

Bringing Down the House was originally featured in the Penny Sleuth.

Now he’s doing it all over again…

In a guest column in the New York Times, Buffett admits he is buying American stocks with his personal money, which was previously tucked away in government bonds. Soon — if Buffett feels that prices will remain attractive — all of the Oracle’s non-Berkshire net worth will find its way into U.S. stocks.

“A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful,” Buffett writes.

We agree…it’s time to get greedy. We’re seeing some cheap stocks out there in Pennyland. And today, we’re going to discuss the best way to find the stocks most likely to surge when the economic outlook brightens…

In last year’s letter to shareholders, Buffett explained that he looks for businesses that he can understand, have favorable long-term economics, able management, and a sensible price tag. If you want to play off of Buffett’s strategy, the first thing you’ll want to look for is a business model you can count on.

Understanding what you own is an essential part of investing. During the tech bubble, as Internet companies grew at an impressive clip, Buffett stayed away simply because he didn’t understand their business prospects. The decision turned prophetic when the bubble burst and online companies went belly-up one by one.

Valuation is equally important. Over the course of the last several months, countless companies have seen their share prices trampled for no real reason at all — just look at Neenah Paper (NP: NYSE), a small-cap paper manufacturer that saw its share price slide 55% in spite of otherwise solid fundamentals.

If you’re looking for solid penny stock plays, another thing to keep in mind is cash. With credit markets still on shaky ground, companies with enough money to stay the course through tough times have a serious liquidity advantage over those who need to borrow to keep afloat.

What should you look out for? Well, Buffett has advice on that too…

“The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines…if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down,” explains the Oracle of Omaha.

Today, there are plenty of companies out there that meet Buffett’s investment criteria. Like Neenah Paper, the company whose price fell for no real reason, there are stocks like chip-maker Silicom (SILC: NASDAQ) and chemical manufacturer Buckeye Technologies (BKI: NYSE) both of whom have solid fundamentals and P/Es under 6.

Even though the markets have been anything but kind to investors lately, fearful investors are making a good case for buying up some undervalued penny plays. The time to get greedy is now.

Regards,
Greg Guenthner & Jonas Elmerraji

October 22, 2008

P.S.: In our current issue of Penny Stock Fortunes, we’ve found another company that is not only undervalued in the current market, but whose entire sector is poised for a huge comeback.

Greed Pays Off When Appropriately Timed was originally featured in the Penny Sleuth.

Are things really as bad as the pundits would make them out to be? You be the judge…

To look at the causes of our current market mayhem, we’ve got to go back to 2006. That’s the year the housing market peaked. For five years, real estate prices had been going on a tear of double-digit increases in home value as more and more people entered the world of home ownership. By 2004, the home ownership rate had reached 69.2% — an all time high.

Demand for homes was also booming; realtors couldn’t seem to keep up with the barrage of business coming to their doorsteps, but that was about to change…

As abruptly as it had come, the housing bubble burst in August 2005 sinking housing prices and delivering a 40% blow to stocks of U.S. homebuilders.

The Aftermath of the Housing Bubble

By 2007, the housing crisis was becoming the biggest problem on the horizon — Treasury Secretary Henry Paulson entered the scene just a year after taking office, calling the housing market “the most significant risk to the economy.” And indeed it turned out to be. Despite the Dow’s ascent past 14,000 for the first time ever in July, tides were turning on Wall Street.

In September, major lenders like Countrywide, Ameriquest, and American Home Mortgage were facing serious financial troubles as credit became harder to come by. By October, housing prices had fallen for 10 consecutive months in what the National Association of Realtors noted was “the first price decline in many, many years and possibly going back to the Great Depression.”

By March 2008 the Dow Jones Industrial Average had fallen 20% in just five months, and Bear Stearns sold itself to JPMorgan for 1.1% of its $170 high the year before. Fast forward today to the first week in October, when the Dow plummeted further than ever in what’s now being referred to as Black Monday 2008.

What Caused the Subprime Run-up?

One of the biggest causes of our current financial crisis was the popularity of subprime mortgages among financial institutions. Subprime loans are loans made to people who are high-risk. Subprime loans carry higher interest rates — meaning higher profits for the lender. But things suddenly changed when the credit market locked up and many consumers were unable to pay their mortgages. Lenders like Ameriquest soon found that the loans they’d made couldn’t be paid off and were next to worthless.

Unfortunately, the fallout wasn’t limited to banks…mutual and pension funds bought subprime debt too, because they had such high rates of return. When those mortgages became worthless, millions of Americans with nothing to do with the problem lost money overnight.

Many people believe that predatory lending was largely to blame for the collapse of the subprime lending market — lenders convinced consumers to sign off on loans that had complicated payment schedules (often increasing over time) and very long payment horizons.

And despite the windfall they found themselves in for a short time, banks soon got caught holding the bag on the subprime fiasco.

The Road Ahead

Just a few days after Wall Street’s worst week, things aren’t looking as bleak as they once were. Uncle Sam’s been intervening, ensuring that the economy doesn’t deteriorate any further. Recently, Secretary Paulson announced that the government would be buying stakes in U.S. banks to the tune of $250 billion.

The news sent stocks on their biggest-ever gain on Monday October 13, the Dow ending 936 points higher than Friday’s close.

Just where our economic crisis will end isn’t sure, but as liquidity slowly comes back to the credit market, chances of a stronger 2009 look better.

Cheers,
Jonas Elmerraji

October 20, 2008

P.S.: There’s a lot of volatility in this market that you can take advantage of. Until midnight tonight, we have the best way to exploit it.

A Breakdown on the Stock Market Crash was originally featured in the Penny Sleuth.