Why You Should Buy the Most Hated Sector On the Market

For more than half a decade, few stocks have been more vilified than those from one out-of-favor sector. Even as the market recovered from its 2009 lows, this entire group was left behind. Investors simply wanted nothing to do with these stocks…
However, the first signs of life in this sector are beginning to appear. And I�ve found a unique way for you to play this hidden rally.
I�m talking about the housing sector. Since the housing market peaked more than 5 years ago, few investors have been willing to go anywhere near homebuilders. For years, these stocks have stagnated. Even sector leaders like Toll Brothers (NYSE:TOL) have failed to see their shares recover from 2008 lows.
Negative news surrounding the housing market continues to command front-page coverage. It�s been all too easy for the media to pile onto the countless human interest stories in the most affected regions of the country. Foreclosure horror stories, entire abandoned neighborhoods, and abusive bank practices remain top stories in the financial and mainstream media alike.
On the surface, housing sector data doesn�t look any brighter. The Case-Shiller index � which measures property values in 20 major cities � showed in its most recent data that home prices dropped 3.7% year-over-year.
But beneath the gloom-and-doom, there are several signs that the environment for homebuilders is improving.
Even Case-Shiller index co-creator Karl Case sees the silver lining in the numbers. Case told Bloomberg last month that the seeds of recovery have already been planted because homes are becoming affordable again. Add in record-low interest rates and you have a reason to be hopeful about housing.
According to the AP, builders broke ground on a seasonally adjusted annual rate of 699,000 homes last month. This milestone puts the seasonally adjusted rate at its highest level since October 2008. These glimmers of hope for the housing market have ignited a stealth rally within the sector:!

Homebuilders Index Quietly Outperforms

Am I arguing that the housing market is ready to boom again? Absolutely not.
But when the skies are completely clear for the housing sector (and many experts are predicting at least two years before the market truly regains its footing) the investing opportunities will have passed us by. Right now, I am seeing the bottoming process play out in this sector.
While it would be completely unrealistic to expect anything even close to housing bubble conditions reappearing, I do believe there is opportunity in this space. There�s value to be found in some of these beaten-down homebuilders. Even though conditions will remain far from perfect for some time, many of these stocks could find higher ground now that the monumental bust that buried every single one of these stocks back in 2008 is beginning to wear off…
Mea Culpa: How I Was (Kind of) Wrong About Zynga
Last week, I warned you about the imminent collapse of Zynga Inc. (NASDAQ:ZNGA), the developer of FarmVille and other fad games for Facebook and mobile phones. I suspected that unrealistic expectations would eventually catch up with the stock. But I didn�t expect that to happen right away.
In fact, I wrote that the stock would probably trade even higher before any hint of a correction:
�Unfortunately, countless eager investors will probably get sucked into this stock before it crumbles,� I wrote just one week ago. �It will begin next week when Zynga will announce fantastic earnings. The company will beat estimates, predict incredible growth and win over plenty of new followers.�
That�s not exactly how it played out…
Yesterday, Zynga announced fourth quarter earnings! that se nt speculators packing. The stock lost nearly 18% of its value by the end of the day. Lower earnings and skyrocketing expenses helped spur the selling.
Needless to say, I was surprised that Zynga couldn�t put together a decent-looking quarter. Even more alarming are the huge research costs that are contributing to the company�s rising expenses. It�s clear that Zynga is going all-in when it comes to developing new games. Of course, there�s still no guarantee that those millions spent on game development will translate to long-term profits. I still recommend avoiding this stock.

Will Nordic American Tankers Whiff on Revenues Next Quarter?

There's no foolproof way to know the future for Nordic American Tankers (NYSE: NAT  ) or any other company. However, certain clues may help you see potential stumbles before they happen -- and before your stock craters as a result.
A cloudy crystal ball
In this series, we use accounts receivable and days sales outstanding to judge a company's current health and future prospects. It's an important step in separating the pretenders from the market's best stocks. Alone, AR -- the amount of money owed the company -- and DSO -- the number of days' worth of sales owed to the company -- don't tell you much. However, by considering the trends in AR and DSO, you can sometimes get a window onto the future.
Sometimes, problems with AR or DSO simply indicate a change in the business (like an acquisition), or lax collections. However, AR that grows more quickly than revenue, or ballooning DSO, can also suggest a desperate company that's trying to boost sales by giving its customers overly generous payment terms. Alternately, it can indicate that the company sprinted to book a load of sales at the end of the quarter, like used-car dealers on the 29th of the month. (Sometimes, companies do both.)
Why might an upstanding firm like Nordic American Tankers do this? For the same reason any other company might: to make the numbers. Investors don't like revenue shortfalls, and employees don't like reporting them to their superiors.
Is Nordic American Tankers sending any potential warning signs? Take a look at the chart below, which plots revenue growth against AR growth, and DSO:

Source: S&P Capital IQ. Data is current as of last fully reported fiscal quarter. FQ = fiscal quarter.

The standard way to calculate DSO uses average accounts receivable. I prefer to ! look at end-of-quarter receivables, but I've plotted both above.
Watching the trends
When that red line (AR growth) crosses above the green line (revenue growth), I know I need to consult the filings. Similarly, a spike in the blue bars indicates a trend worth worrying about. Nordic American Tankers' latest average DSO stands at 102.5 days, and the end-of-quarter figure is 117.3 days. Differences in business models can generate variations in DSO, and business needs can require occasional fluctuations, but all things being equal, I like to see this figure stay steady. So, let's get back to our original question: Based on DSO and sales, does Nordic American Tankers look like it might miss it numbers in the next quarter or two?
Investors should watch the top line carefully during the next quarter or two. For the last fully reported fiscal quarter, Nordic American Tankers' year-over-year revenue shrank 56%, and its AR grew 9.8%. That's a yellow flag. End-of-quarter DSO increased 149.3% over the prior-year quarter. It was up 186.6% versus the prior quarter. That demands a good explanation. Still, I'm no fortuneteller, and these are just numbers. Investors putting their money on the line always need to dig into the filings for the root causes and draw their own conclusions.
What now?
I use this kind of analysis to figure out which investments I need to watch more closely as I hunt the market's best returns. However, some investors actively seek out companies on the wrong side of AR trends in order to sell them short, profiting when they eventually fall. Which way would you play this one? Let us know in the comments below, or keep up with the stocks mentioned in this article by tracking them in our free watchlist service, My Watchlist.

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