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FAF—A Title to Profits

Builders aren't the only way to play the pick up in housing


The U.S. economy isn’t exactly booming, but there is one sector that’s enjoying a very robust rebound off its troubled lows of just a few short years ago: housing.

Housing stocks enjoyed big gains in 2012, with homebuilders such as PulteGroup (NYSE:PHM) and Lennar Corp. (NYSE:LEN) nearly doubling in value last year. Those stocks represent strong candidates for traders, but they aren’t the only stocks to buy in the housing sector that are worth occupying with your trading capital.

One company benefiting mightily from a rebound in both existing and new home sales is title insurance company First American Corp. (NYSE: FAF).

If you stop and consider that every time a home is sold, and every time a house is refinanced, title insurance companies make money. Well, First American Financial is one of those companies, as evidenced by a Q3 profit increase of 375% to 95 cents a share. That stellar showing was in part helped by the company’s $47.3 million in net investment gains from the sale of its remaining stake in research firm CoreLogic (NYSE:CLGX), a research arm it spun off in 2010.

The California-based First American is the second-largest title insurance company after rival Fidelity National Financial (NYSE:FNF). The company operates nationally, and it even has some business overseas. With about 27% market share in the United States, First American is just slightly behind Fidelity National, which has approximately 34% of the title insurance market.

One great reason to like FAF shares for traders is the stock’s fantastic buying momentum. The chart here of FAF clearly shows the favorable trading taking place in the stock.

FAF shares are up about 93% over the past 12 months, which is nearly double the gain that FNF shares have undergone over the same time period. That’s one reason why I prefer FAF shares for traders over FNF.

If we see a continuation of the positive metrics in new home sales in Q1, and most analysts expect we will, then FAF could see a strong first quarter. That will likely keep propelling the stock higher over the next several months.

For traders, this amounts to your own title—a title to likely gains in FAF shares in Q1. I think the stock has upside of at least 14.5% during the next several months, and at the current share price that would mean a jump to $28.50.

Finally, if you want to make sure you don’t take a big loss on this trade if the metrics in the housing space begin to falter, then I recommend putting a stop-loss order in along with your market order at about 8% below your buy price.

At the time of publication, Jim Woods did not hold a position in any of the stocks mentioned here.

Article printed from InvestorPlace Media,

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