What the experts say
A case for builders stocks; Tax refunds that pay dividends; Avoiding lottery-like stocks
A case for builders stocksFew sectors of the stock market are “loathed” more than home builders right now—which is precisely why they’re worth a second look, said Elizabeth Ody in Kiplinger’s Personal Finance. While analysts expect “every publicly traded builder” to lose money in 2009, those expectations are already priced into the stock values—and builders’ stock prices usually turn around before the housing market does. “It’s entirely possible that builders will rally while we’re continuing to see declines in home prices,” says Jay McCanless, an analyst with FTN Equity Capital Markets. Investors in the market for individual stocks should focus on builders with hefty cash reserves, such as NVR and MDC Holdings. “Both can snatch up cheap land when demand turns around.” If you prefer investing in exchange-traded funds to picking individual stocks, a good choice is SPDR S&P Homebuilders ETF.
Tax refunds that pay dividendsTaxpayers often treat refunds as windfalls to be spent at the mall or on vacation, but this year is different, said Catherine Clifford in CNNmoney.com. “With the economy locked in recession and the unemployment rate at a 25-year high, there might be more practical ways to spend the extra cash.” Last year, the average refund was $2,705, according to the Internal Revenue Service. If used well, that much money could go a long way toward shoring up your finances. Most experts agree that a first priority should be paying down high-interest credit card debt or beefing up emergency reserves. If those areas are already covered, consider investing your windfall. “While stocks have started to climb back from multiyear lows, the major indexes still have a lot of growing room, and now is the time to take advantage.” If you invest via an IRA or a Roth IRA you’ll pay less in taxes—and have a better shot at seeing more refunds in the years ahead. Avoiding lottery-like stocks“Committed lottery players annoy me,” said Jack Hough in SmartMoney. “I think: If you just invested that much each week, you’d make your own jackpot.” But perhaps they wouldn’t do any better after all. According to researchers at the University of Texas at Austin, people who play the lottery tend to have the same socioeconomic traits as people who buy shares in “lottery-type” stocks—those with low prices, lots of volatility, and abnormally high past returns. These people take a winner-take-all approach to their portfolios, and, perhaps unsurprisingly, these lottery-like stocks “lose almost as surely as the tickets.” They underperform “ordinary” stocks by an average of 4 percentage points a year.