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Not Too Late to Short the Homebuilders

By Michael Shulman

Louisiana-Pacific

Similarly, Louisiana-Pacific was a $2.2 billion outfit whose branded line of building products had too much exposure to the low-end home and home renovation market. The company creates paneling, siding, decking, molding and trimming materials.

When we shorted it back in September, it was losing money, and had been for a few quarters. At the time, it was a $17.50 stock that had the potential to fall to $12 within six months.

In fact, it only took two months for our puts to become profitable. We had bought the Feb 15 Puts for 90 cents on Sept. 13, and on Nov. 27, we banked a nice 122% gain when the stock plummeted to $13.50 and our puts jumped to $2.

Universal Forest Products

Universal Forest Products is another story -- a $2.6 billion company that produces all sorts of lumber, wood, plastic and other building products that are sold in North America. The stock was also a mess -- down from $80 a share in mid-2006 to trade at $30 when we were looking to ride its downside by buying put options.

Its puts were downright inexpensive compared to where they should have been trading. But that's the beauty of what we do -- we look for great entry points and get situated before Wall Street comes to its senses and gets the same idea. And then we sell them our puts at a much higher premium than we paid for them!

This was definitely the case with Universal Forest Products.

On Sept. 13, I predicted the stock, then around $35, could easily hit $25 by February. So, we established a position in the April 30 Puts for $1.70 (or $170 per contract to control 100 shares). Thus, we were making a bet that the stock would drop at least five points in the space of a few months.

It actually took less than two months for shares to dip to $28. At the end of November, our puts skyrocketed to $3.80. That was my cue -- I sent my subscribers a special sell alert, and we took our 123% winnings off the table.

Make Their Pain Your Gain

These companies have the same story as many of the material suppliers and homebuilders who are still in our ChangeWave Shorts portfolio: decent management, but shrinking sales, prospects and profits.

I don't expect any of these guys to go out of business. And, in fact, when housing does find a bottom, they may even get started on the long, hard road to recovery. But in the meantime, it doesn't hurt to make some money from their misery.

In fact, after the beating that many of our long-side holdings might have taken earlier this year, it behooves us to make profits wherever we can -- and as often as possible!

Home may be where you hang your hat, but my hat is definitely off to the homebuilders and their suppliers for giving us many spectacular short-side profits, and many more to come.