The last two times what I’m about to show you happened, the gains were incredible… up 500% in three years, and 200% in four years…

Now, it is happening again… so we’re buying. So what’s the secret?

It’s time to buy shares of homebuilding companies. As I’ll show, when homebuilders get extremely pessimistic about their futures, you can make hundreds of percent in returns.

The latest numbers are out from the National Association of Homebuilders (www.nahb.com). The NAHB polls its members monthly. One question they ask builders is how they feel about prospective sales over the next six months.

Now, you might think that the time to buy shares in homebuilders is when executives are optimistic about their businesses. But the reality is exactly the opposite, as the chart shows.

The message from the chart is clear to me: When homebuilders get extremely pessimistic, chances are, you’re near a bottom in the shares of homebuilding stocks. And on the flip side, when builders are extremely optimistic, it’s time to start worrying about a peak the share prices of homebuilding stocks. It’s the complete opposite of what most people believe.

You can never know when builder’s expectations will hit bottom… and you can’t know if they’ll turn down again. But NAHB President David Pressly said yesterday: “This was the third consecutive month in which builder expectations for sales over the upcoming six-month period have improved, and it’s a good sign of things to come in the new year.”

Three straight months of improvement in builder expectations is a good sign. In my newsletter True Wealth, I jumped on this trade early, recommending shares of one homebuilder after just one month of improvement in the expectation numbers. Now, we’ve had three straight months of improvement. To me, this is a sign that the trend I thought we might see appears to be happening.

The blue-chip homebuilding stock I recommended two months ago is already up about 15% since I recommended it. In my riskier newsletter, Sjuggerud Confidential, I recommended a smaller homebuilder – it’s now up over 25%!

It is my belief these gains are just getting started. The last two times around, we saw hundreds of percent gains. This time around should be on different.

That’s why, shares of homebuilders are our favorite trade in 2007 here inDailyWealth. It’s a rare circumstance where all three of our “buy” criteria are lining up. They’re cheap, hated, and in an uptrend – our recipe for big gains.

Good investing,

Steve

Editor's note: Steve Sjuggerud is a regular contributor to DailyWealth, a free investment newsletter focused on the world's best contrarian opportunities. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments.