When you think about housing-related investments, homebuilder stocks should come to mind.
These companies turn the dream of new housing into reality. They buy up land, design communities, and build the homes that make the dream possible.
New-home sales soared in recent years… while existing-home sales collapsed. That led to a massive boom in homebuilder stocks. But as 2024 ended, so did the good times.
This group of stocks crashed… dropping 18% in less than a month.
The good news is, homebuilders clearly fell too far, too fast. And according to history, that created an incredible opportunity.
Similar setups led to 75% gains in just 12 months. And given the quick rebound we’ve already seen, the next homebuilder boom could already be underway…
Contrarian investing is about finding opportunities in places everyone else has given up on.
That doesn’t mean every crash will turn into a buying opportunity. But if you find a great asset that others have discarded, you’ve got the kind of setup that can produce massive profits.
This is the situation in homebuilder stocks right now. The sector crashed 18% in less than a month between late November and late December.
This decline is overdone, though. We can see it by looking at the relative strength index (“RSI”).
The RSI looks at recent moves to see if prices have swung to an extreme in either direction. When assets are selling off too fast, they’re “oversold”… And when investors can’t get enough of them, they’re “overbought.” In either case, a reversal is usually on the way.
For homebuilder stocks, the iShares U.S. Home Construction Fund (ITB) recently fell to an RSI below 20. That’s well below the typical oversold threshold of 30. Take a look…
ITB had flatlined for months in the back half of 2024. Then, it collapsed double digits. That sent its RSI to its lowest level since the pandemic bottom in March 2020.
This tells us folks have absolutely no interest in owning these stocks. It also means the recent decline went too far, too fast.
History agrees. I looked at every other time ITB’s RSI fell below and then rose back above 20 since 2010. And they were all incredible buying opportunities. Take a look…
We’ve had a good 15-year run for homebuilder stocks. ITB has risen 15% per year in that stretch. But if you’d bought after its RSI collapsed, your returns would have been much better…
Similar setups led to 19.8% gains in three months, 46.7% gains in six months, and 74.6% gains over a typical year. Those are absolutely massive returns… roughly five times better than the annual buy-and-hold result.
Now, we have only seen four other instances like this in 15 years. So these RSI setups are rare. But ITB was up a year later in every case. And with a typical one-year gain of 75%, it’s hard not to look twice at homebuilder stocks right now.
Plus, ITB has already rebounded from its bottom earlier this month. That means the next homebuilder boom could already be underway. And the eventual upside could be massive in the months ahead.
That makes it a contrarian trade you need to consider right now.
Good investing,
Brett Eversole
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Source: Daily Wealth