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The Best Way to Play the Housing Recovery

By Frank Curzio, editor, Small Stock Specialist
Friday, December 21, 2012

The housing recovery has created a powerful tailwind for homebuilders... 
It's difficult to find a better-performing sector. Over the past year, the average homebuilder stock is up over 80%. That's about five times higher than the S&P 500 index.  
My friend and colleague Steve Sjuggerud nailed the big uptrend in homebuilders. He told DailyWealth readers to buy the sector in November 2011. If you followed his advice, you're probably sitting on huge returns today.
After such a strong rally, homebuilder stocks are expensive, and I wouldn't recommend them at these prices. But there's a better, cheaper way to make money as the housing recovery continues... 
Homebuilder stocks have outperformed the S&P 500 more than five-to-one because we're finally seeing a recovery in most major U.S. housing markets.
U.S. Homebuilders Up Huge in Last 12 Months
Prices have risen for nine straight months, while the inventory of homes has fallen for the last five months. There is only a five-month supply of homes on the market. That's a sharp decrease from a year ago, when the supply of homes stood at 11 months.
I expect the housing recovery to continue. The Federal Reserve has said it will do everything in its power to keep interest rates near historic lows. That's good news for homebuyers looking to take out a loan. Plus, most of the major banks are sitting at 52-week highs. They're in much better shape to lend money than they were during the credit crisis of 2008.
However, based on the recent surge in homebuilders, I don't suggest buying these stocks today. The Dow Jones U.S. Construction Fund (NYSEARCE: ITB) is trading at an expensive 27 times earnings. A better way to play the recovery in housing is to buy chemical companies.
Chemical companies make products found in building materials, paint, carpets, and tiles. Most companies in the sector are trading near 52-week highs. However, unlike the homebuilding stocks, these companies are still cheap.
Dow Chemical (NYSE: DOW), E.I. DuPont, and Ashland (NYSE: ASH) trade at 12 times earnings. That's a 15% discount to the average S&P 500 company. Small-cap names like Huntsman (NYSE: HUN) and Stepan Company are trading below 10 times earnings – and also pay a dividend.
Chemical companies are also seeing a boom in earnings as raw material costs come down. The prices of natural gas liquids (NGLs) are trading near 10-year lows due to the boom in natural gas drilling. NGLs include propane, butane, and ethane. These key materials are used by chemical companies to make everyday products, like the fuel many folks use for their backyard barbecues (propane).
If you are looking for an alternative way to play the recovery in housing, forget the homebuilders for now. These stocks could fall 20% each and still be overvalued.
I suggest buying chemical companies. Most of them are seeing huge earnings growth. They're also still dirt-cheap. I wouldn't be surprised to see 25%-plus gains in these names over the next six to 12 months.
Good investing, 
Frank Curzio

Further Reading:

Homebuilders may be expensive today, but there are other ways to profit off a housing recovery. Learn about Steve's favorite real estate ideas here:  
Shares of this company are cheap today... and pay a 12% dividend.
"Buying shares of this company is a much simpler way to own U.S. property than going out and doing it yourself."

In The Daily Crux
Market Notes
Financial stocks continue their big run... financial fund XLF touches a fresh 18-month high.  
Long-term precious metals uptrend takes a break... gold and silver prices touch three-month lows.
A breakout for airlines... Delta and U.S. Airways top a short list of stocks up 30%-plus in three months.  
Japanese banking giants Sumitomo and Mizuho jump to 18-month highs.
Market Watch
Symbol Price
S&P 500 1359.88 +0.5% +9.9%
Oil (USO) 31.93 +1.4% -18.8%
Gold (GLD) 165.88 -0.1% -3.3%
Silver (SLV) 31.21 -1.0% -4.9%
U.S. Dollar 81.18 0.0% +4.0%
Euro 1.27 -0.6% -5.6%
Volatility (^VIX) 16.41 -8.8% -51.0%
Gold Stocks (^HUI) 440.85 +0.9% -24.7%
10-Year Yield 1.57 -1.3% -22.3%

World ETFs
Symbol Price
Singapore (EWS) 12.76 +2.6% +17.5%
S. Korea (EWY) 56.65 +0.4% +7.6%
Taiwan (EWT) 12.69 +2.1% +7.4%
S. Africa (EZA) 64.65 +3.6% +9.3%
USA (SPY) 136.37 +0.5% +12.3%
India (IFN) 21.53 +10.3% +7.3%
China (FXI) 35.77 +0.4% +1.8%
Canada (EWC) 27.10 +1.9% +2.9%
Japan (EWJ) 9.06 +2.9% +2.7%
Israel (ISL) 12.45 -1.0% -4.8%
Lat.America (ILF) 40.87 +1.1% -4.4%
Russia (TRF) 13.68 +2.7% -11.2%

Sector ETFs
Symbol Price
Construction (PKB) 15.81 +1.9% +36.3%
Media (PBS) 15.66 +0.8% +22.7%
Financials (IYF) 57.01 +1.3% +22.3%
Consumer Svcs (IYC) 83.17 +1.4% +21.1%
Water (PHO) 19.09 +1.0% +13.4%
Insurance (PIC) 16.65 +0.1% +13.0%
Health Care (IYH) 81.37 +1.3% +21.9%
Telecom (IYZ) 22.91 +1.0% +14.3%
Real Estate (IYR) 61.89 +2.4% +17.7%
Industrials (IYJ) 68.59 +0.9% +11.5%
Big Tech (QQQQ) 62.30 +0.4% +10.1%
Defense (PPA) 19.53 +0.6% +10.2%
Retail (PMR) 24.59 +1.2% +16.0%
Biotech (PBE) 22.19 +1.7% +16.4%
Software (PSJ) 25.98 +1.1% +4.2%
Basic Mat (IYM) 63.96 +1.1% -0.9%
Transportation (IYT) 86.80 -0.2% +1.1%
Semis (PSI) 13.12 +0.6% -9.3%
Utilities (XLU) 34.36 +0.9% +2.5%
Nanotech (PXN) 5.44 +0.2% -14.0%
Alt. Energy (PBW) 3.53 -0.3% -34.6%

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