Market Overview

Short Interest in Homebuilder Stocks Falls (HOV, MTH, PHM)

The short interest in most residential construction stocks fell during the latter two weeks of January, as the rebound in housing continued.

The short interest in Beazer Homes (NYSE: BZH), D.R. Horton (NYSE: DHI), Hovnanian Enterprises (NYSE: HOV), K.B. Home (NYSE: KBH), Meritage Homes (NYSE: MTH), NVR (NYSE: NVR), PulteGroup (NYSE: PHM), Ryland Group (NYSE: RYL) and Standard Pacific (NYSE: SPF) declined between the January 15 and January 31 settlement dates.

But the number of shares sold short in Lennar (NYSE: LEN), MDC Holdings (NYSE: MDC) and Toll Brothers (NYSE: TOL) grew somewhat during that time.

Of note, both Home Depot (NYSE: HD) and Lowe's (NYSE: L) saw short interest rise by double-digit percentages in late January.

The biggest percentage declines in short interest in the stocks of hombuilders between the January 15 and January 31 settlement dates happened to Hovnanian Enterprises, Meritage Homes and PulteGroup.

Hovnanian Enterprises

This Red Bank, New Jersey-based builder of residential homes saw short interest fall more than 17 percent in late January to 30.59 million shares. That was the lowest number of shares sold short since October. Short interest is still more than 27 percent of the float, though.

Recently, an investigation was launch into whether the Hovnanian board breached its fiduciary duties by seeking shareholder approval for an increase in the number of authorized shares of Class A common stock. The company has a market capitalization near $790 million. But its long-term earnings per share (EPS) growth forecast is only about five percent. Its forward earnings multiple is less than the industry average price-to-earnings (P/E) ratio.

Of the 12 analysts who follow the stock that were surveyed by Thomson/First Call, none recommend buying shares. Not surprisingly, their mean price target, or where they expect the share price to go, is lower than the current share price. But the high price target represents about 21 percent potential upside.

The share price has retreated more than 22 percent year to date. But the stock still has outperformed competitors D.R. Horton, Lennar and PulteGroup, as well as the broader markets, over the past six months.

Meritage Homes

Shares sold short in this builder of single-family detached homes declined more than 21 percent to about 1.69 million, the lowest short interest in at least a year. The short interest has been dwindling since November and is now less than six percent of the float.

This Scottsdale, Arizona-based company has a market cap of about $1.5 billion. In January, Meritage was upgraded on its performance and growth, and it announced that it would move its headquarters to a larger space next year. The company's return on equity is almost 18 percent, but the long-term EPS growth forecast is only about four percent. The P/E ratio is less than the industry average.

Out of 16 analysts polled, seven of them recommend buying shares, including three who rate the stock at Strong Buy. The mean price target is less than the current share price, which indicates a consensus view that there is currently no upside potential.

Shares are up about seven percent year to date, despite pulling back last week. Over the past six months, the stock has underperformed competitors D.R. Horton, K.B. Home and Lennar, but it has outperformed the S&P 500.

PulteGroup

Short interest in this Bloomfield Hills, Michigan-based builder shrank about 30 percent to 22.03 million shares. The number of shares sold short has been shrinking since November and now is less than seven percent of the float.

PulteGroup said its fourth-quarter profit jumped fourfold as orders surged 27 percent. But the company has not entirely put the subprime mess behind it. Its market cap is more than $7 billion. The long-term EPS growth forecast of this S&P 500 component is about 35 percent, but the P/E and PEG ratios are higher than the industry average.

Twelve of the 22 surveyed analysts recommend buying shares, with four of them rating the stock at Strong Buy. Their mean price target is about the same as the current share price. But the highest individual price target represents more than 24 percent potential upside. That would be a level shares have not seen since 2007.

Shares have pulled back in the past two weeks, mostly erasing the gain since the beginning of the year. But over the past six months, the stock has outperformed D.R. Horton and Lennar, as well as the broader markets.

Posted-In: Beazer Homes D.R. Horton hovnanian enterprises K.B. Home lennarLong Ideas Short Ideas Trading Ideas Best of Benzinga

 

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