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Tickers in this Article: NVR, PHM, HOV, BZH, DHI, XIN, GFA
The economic environment is still abysmal for construction companies, and therefore their stocks, so somebody might want to tell that to whoever was buying into these names last week. The Dow Jones Home Construction Index was up 43.9% last week, and the Dow Jones Heavy Construction was up 40.4%. That doesn't exactly scream "recession", although that's exactly what the National Bureau of Economic Research was screaming on Monday. A closer look is merited, just in case there's actually a valid reason for the renewed strength.

As it turns out, there is indeed a valid reason for some - though very few - of these stocks to finally start healing despite a construction spending plunge in October. The Commerce Department released the spending numbers on December 1, showing a 1.2% decline, which was more than the 0.9% decline that analysts expected. Unfortunately, the stocks being "healed" the best lately aren't actually the stocks of the healthiest companies. Allow me to separate the weak from the strong before anybody else pours a foundation on the wrong real estate plot.

The Usual Suspects
Sometimes the top names in the business suffer like all the rest of the companies, and sometimes they suffer considerably more than the rest. The latter case is what we're mostly seeing now, with significant players like Pulte Homes (NYSE:PHM), Hovnanian Enterprises (NYSE:HOV) and Beazer Homes (NYSE:BZH).

All are industry icons, yet all are deep in the red on a painfully consistent basis now. All lost money in each of their last four quarters, if not longer. Not surprisingly, they all have a lot of inventory on the books as well.

I know that qualifies me for a "Master of the Obvious" award. However, my goal was to illustrate a stark difference between some of the worst companies and some of the, well, not-so-bad companies.

The Unsung Heroes
Remember the "invest internationally" chat you probably had with your broker back when having a broker was en vogue? Well, he or she was on to something.

Guess which homebuilding companies have actually been making money lately: Xinyuan Real Estate Company (NYSE:XIN) and Gafisa S.A. (NYSE:GFA). Please don't misunderstand - life's not been a cakewalk for either of these foreign companies since a global recession impacts real estate too. However, these companies didn't go nuts in the middle of a real estate heyday, only to end up being over-inventoried now.

The hunt for a viable/profitable American homebuilder starts and ends with NVR Inc. (NYSE:NVR) - a mid-cap company that apparently navigated the crisis pretty nimbly. (For a deeper look at a corporation's inventory turnaround times and its receivables, read Measuring Company Efficiency and Inventory Valuation For Investors: FIFO And LIFO.)

The message is straight-forward: Don't lump all homebuilders into the same disgusting mess. There are a few standouts that could make for great long-term holdings. The market, however, is assuming they're all one and the same, which means there are values for those who bother to look for them. Specifically, I like companies with a lot of cash and not a lot of inventory.

There's a caveat to the outlook however. I don't expect the true bottom for this group to be made until we start to see some consolidation. We've seen none yet, which is a little surprising considering just how badly some of these companies have been beaten up, and while others are holding nice cash positions.

I suspect the hesitation is uncertainty. None of these companies wants to make an acquisition knowing that cash may be more desirable in the future than a troubled acquisition may be. Once we see a couple of mergers, though, I think that'll be the sign that even these guys see better days ahead. Until the majority of them start to rise though, a really nasty riptide may still be too much for even the best of these companies. (For related reading, see Cashing In On Corporate Restructuring.)

Bottom Line
The NBER finally got around to telling us today that a recession started in December of 2007. If history repeats itself, that means the recession is close to being over (if it's not over already). If so, they'll let us know about it several months from now, long after real estate and homebuilders and all stocks for that matter have started to come out of their slump. Maybe it's time to go fishing now.

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