By Scott Ronalds

Housing stocks make me squeamish. It was painful to watch them fall like a rock over the last couple of years as the U.S. real estate market imploded. A number of companies faced bankruptcy or saw their share prices slashed due to stretched balance sheets, huge unsold inventories and weak consumer demand.

Our global equity manager, Edinburgh Partners Limited (EPL), took their lumps on Pulte Homes, a Florida-based builder, which they sold last year after their worst-case-scenario estimates on the company’s book value and earnings were realized. Although the position was fairly small, Pulte was a clear loser for unitholders of the fund (including yours truly; the fund represents 25% of my portfolio). EPL made some strategic moves when the markets were bottoming and has since regained much lost ground, but Pulte sticks with me for whatever reason.

The U.S. housing market is still a pretty ugly place. Especially in places like Arizona, California and Nevada, where speculative activity was the highest during the days of mad flipping. Yet, as the economy pulls itself out of recession, opportunities are emerging. While there are still plenty of foreclosures, there are signs of a floor being reached in many markets, and unsold inventories are winding down. For those with a very high tolerance for risk, an investment property in Scottsdale, San Diego or Vegas may turn out to be a big winner a few years from now.

For more conservative investors, taking a longer term view on homebuilders could prove to be a good bet. As the economic storm passes, the best of the group will return to profitability in a world with fewer competitors and more end-users (i.e., those looking to buy a home to live in, rather than trying to sell it for a quick buck). Edinburgh Partners feels the risk/reward tradeoff is enticing enough to revisit the sector, and they’ve found what they believe to be a good opportunity in DR Horton, a Texas-based homebuilder. They like Horton because the stock satisfies all of their requirements from a valuation perspective (e.g., it’s cheap on a number of measures). The company is also one of the largest homebuilders in the U.S. and their focus is on the lower end of the market with respect to price point. In other words, their homes are affordable and appealing to first-time buyers.

Pulling the trigger on a housing stock right now may not feel overly comforting. Yet, the best investments are often made when you feel the least comfortable. Tom referenced this notion in a recent Globe column where he quoted the late Peter Bernstein, “If you are comfortable with everything you own, you’re not properly diversified.”

I felt pretty uncomfortable eight to twelve months ago when EPL was buying bank stocks, Chinese internet companies and Hong Kong land developers, but those investments have since proven to be very wise. This is what we pay them for. They take emotion out of the game as best they can and buy undervalued stocks, wherever they may be found. And their experience and longer-term track record speaks for itself.

So go ahead, make me squeam.