The economy is off to a roaring recovery and the market is riding right along with it. Louis Basenese sums it up well here.

In the meantime, out of the 51 companies in the S&P 500 that have reported earnings this season, 88% have surprised on earnings and 70.5% have surprised on sales.

That’s good news for the economy. And for the market.

So what particular profit angle are we going to take today?

Home building.

No, I’m not crazy. It’s time for homebuilders to start picking up the pieces and get back to work. Housing starts have already shown an increase from the bottom.

Don’t start pointing out all of the empty, unsold developments in Las Vegas, Arizona and other trouble areas. After all, there’s a reason we can ignore those.

Obviously, houses can’t just be moved. That means an extra house in an overbuilt Florida suburb doesn’t have any value in a suburb of Washington, D.C. where housing starts are picking up.

In effect, the bad areas can be “quarantined” while the rest of the nation recovers.

And homebuilders aren’t dumb. They can pick and choose where to build. They’re now actively searching out profitable projects and putting up houses.

We’re going to earn our profits by buying a vital small-cap supplier, Universal Forest Products (Nasdaq: UFPI).

Based in Grand Rapids, MI, the company designs, manufactures and distributes wood and wood-alternative products. A simple business, but a profitable one nonetheless.

The company serves four different markets (parenthesis indicate the percentage of Universal Forest’s sales):

• Do-it-Yourself/Retail (48%): Universal is a major supplier to Home Depot and other similar outlets that supply individuals and small-to-medium contractors.
• Site-Built Construction (14%): The company serves large-volume, multi-tract residential homebuilders, like the big boys we expect to start new projects. Universal believes itself to be the largest consolidated supplier to this industry.
• Manufactured Housing (28%): Similar to the site-built construction, but this market builds modular and mobile homes at a central location and ships them to the home’s eventual place.
• Industrial (10%): By providing pallets, crates and wooden boxes to industrial customers from the by-products of Universal’s main business, the company gets to pad the bottom line at a very low cost.

This diversification will allow us to benefit whether the first moves come from national homebuilders or weekend warriors adding a sun porch to the house.

Universal Forest doesn’t grow timber, but purchases from mills. It’s one of the largest domestic buyers of solid sawn softwood, allowing it significant prices power. And Universal Forest passes any rise in lumber price along to its buyers.

Of course, Universal Forest just surprised on earnings. It just posted the highest first quarter profit in three years, and the first year-over-year sales increase in two years.

Sales jumped 9%, thanks to an increase in lumber prices. The manufactured housing division jumped 32% and the industrial division rose 20%… suggesting the turnaround we expect has already laid a foundation.

Analysts are likely still toying with the negative cash flow from the first quarter. Thankfully, it’s purely an accounting transaction as the charge was merely to raise working capital for the turnaround and ahead of the company’s traditional busy season. That gives us a chance to buy in.

The stock is exhibiting the classic, surprise-jump-cool off pattern we like to see. So let’s get in today.

Action to take: Buy Universal Forest Products (Nasdaq: UFPI) for $41.50 or less. Speculators can consider the July $45 calls, but don’t pay more than $1.50.