Watching the sun set ......

While I hate classifications like "value investor" and "growth investor" because by definition every investor is a value investor, if I had to put myself one group I would be in the value camp. I don't think its a stretch to say that just about every value investor is keeping an eye on publicly traded homebuilders as they have been decimated and there will undoubtedly be a very attractive investment opportunity.

The question is .....when?

I will not attempt to predict a bottom in the housing market and homebuilder shares ....not now, not ever. What I will do is share a short "anecdotal" list of things I am watching for to let me know that we are closer to the bottom than the top:

1) multiple bankruptcies of the weakest most leveraged players
2) insider purchase activity at the leading players in the industry
3) large net income losses and massive write-downs
4) largest players in the industry trading below $10 per share
5) politicians become "unanimously outraged" at something
6) nutty valuations

While this list is not in any specific order, my experience has been that when the bubble bursts and things really get hairy, the weakest players are the first to go. We got news on Friday that LEV has filled for Chapter 11. Also, the good people at Calculated Risk report that BZH is having a hard time paying some of its sub-contractors -- not technically a bankruptcy but close enough. My guess is that CHCI and TOA are next.

Points #2 - #4 are fairly straight forward. It looks like the chairman of NVR--probably the most attractive publicly traded homebuilder--just bought a bit over $1M in stock on the open market. Also, I know that I have provided zero evidence that a sub $10 stock price is anything but an arbitrary number and has any meaning what so ever but my experience has been that when this happens across an industry it's a good time to start looking and doing some non-arbitrary research.

Point #5 is a bit trickier but I am basically watching for bipartisan agreement that something bad has happened. When politicians can loudly agree on something it means that the problem has fully materialized and the public has experienced all the consequences -- meaning that the problem is old news, has been priced into the market, and savvy investors have started looking ahead. While its hard to state exactly what the government will do regarding the housing implosion there is no shortage of politicians giving their unanimously outraged opinions on the issue. Watching the Bernake testimony this Thursday reinforced the feeling that politicians are unanimously outraged at what has gone on and are itching to do something that can be used as tangible evidence to their constituents that they are outraged and are doing something about this outrageous outrageousness.

Point #6 should not be on this list because there is nothing anecdotal about it. This is the hardest thing to see and requires a lot of non-arbitrary number crunching. I will be doing more work on NVR (and posting it here) and maybe one or two other publicly traded homebuilders to get an idea of what price represents a truly crazy valuation.

Using my list, if one can apply the old adage that "its always darkest before dawn" to the publicly traded homebuilders than we are watching the sun set and its getting noticeably darker outside.

* DISCLOSURE: I or accounts I manage may be long or short any and/or all stocks mentioned in this post. This is not a recommendation to buy or sell any security. For informational and educational purposes only.