It's easy to be a contrarian when everyone else is.
No, that's not one of Yogi Berra's many famous malapropisms. It's a pinched original (if there is such a thing), but a truthful one. It is easy being a contrarian when price-to-earnings and price-to-book ratios are low, but not when the price has failed to plummet and the news is still relatively good.
True contrarians, on the other hand, strut their stuff when everything is low -- price, margins, news, outlook, and sentiment. Such is the case with the beaten and battered homebuilder sector. The iShares Dow Jones US Home Construction ETF
There isn't much good out there in the sector, but NVR Industries
So, would a contrarian prefer the good, the bad, or the ugly? Everyone who follows housing knows NVR is the class company of the field, but the class company doesn't equate to the class stock, because the stock price reflects its superior standing. Hovnanian simply has too much debt, which is why its name and the word “bankruptcy” are often uttered in the same sentence.
That leaves the bad. MDC and Toll Brothers have been sufficiently pounded by the market – reflected in their steep discounts – but both are likely to survive. In short, they have more room to improve than NVR, but are less likely to fail than Hovnanian, so that's where I'd hang my contrarian hat.
Fool contributor Stephen Mauzy, CFA, does not hold positions in any of the stocks mentioned above. MDC Holdings is a Motley Fool Hidden Gems selection. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy regulates all Fool commentaries.
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