Walk — Don’t Run — Into Hovnanian

by Ethan Roberts | November 7, 2012 9:10 am

Homebuilder stocks have been red-hot in 2012, but few have been hotter than small-cap Hovanian Enterprises (NYSE:HOV[1]).

Hovanian — a Red Bank, N.J.-based builder of single-family homes, town homes and condominiums throughout 16 states — is a low-priced, heavily trafficked, volatile stock that has trounced both the S&P 500 and its peers since October 2011.

HOV has had a blistering 2012, running up more than 260% year-to-date, and shareholders have enjoyed a tremendous gain of 176% since my bullish article about it earlier this year[2]. Heck, in the past four days alone, HOV has gained nearly 25%!

But can this stock continue its lofty ascent without a monster stumble first? Can it continue its lofty ascent period?

I believe it can, as the HOV story still has several ongoing positives.

Technically Speaking

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A look at the six-month chart for HOV shows just how strong the stock has been from a technical standpoint. It continues moving well above both the 50- and 200-day moving averages. Up days have been accompanied by strong volume, and on down days, the volume has been noticeably lighter.

The stock recently took out September’s resistance level at $5. The next major overhead resistance, established back in May 2010, is around $7.50, so HOV still could be expected to gain about 40% from its current price.

Both the relative strength index and stochastic oscillator are now in overbought territory, at respective levels of 80 and 97. Notice the subsequent decline in stock price the last time the RSI was at these levels (green shaded area) in mid-September. Pullbacks on HOV can be quite volatile, with the last few ranging from 15% to 20% on average, so buying at the peak of a run-up could be dangerous. Thus, despite its recent strength, more cautious investors might want to wait for a pullback on Hovnanian stock before entering.

Fundamentally Speaking

HOV continues to show improvement on the business side as well. In early September, HOV reported strong third-quarter results, including a 64.3% earnings surprise and impressive year-over-year growth in new home orders.

The adjusted loss of 5 cents per share was far better than the 14-cent loss expected by the Street, and a significant improvement from the 47-cent loss of a year ago. Net sales were up 35.5% YOY to $387 million, reflecting a dramatic recovery in the new construction market.

Fourth-quarter revenues are expected to match or beat First Call analyst estimates of $459 million[3], according to the Associated Press — and would be better, except Hurricane Sandy delayed more than 50 closings near the end of October, pushing them into the next fiscal year. Therefore, HOV now has a built-in head start on next year’s earnings as well.

Recently, HOV has been increasing its land and development investments, yet still has boosted its cash balance to $252 million over the last quarter. This was impressive enough for Standard & Poor’s to raise its corporate credit rating on HOV from CCC- to CCC+.

Looking Ahead

Record-low mortgage rates should continue to boost demand for new construction over the next few quarters, and that will bode well for HOV, as well as bigger homebuilder names like D.R. Horton (NYSE:DHI[4]) and PulteGroup (NYSE:PHM[5]).

But there are several caveats that investors need to heed in considering HOV, including the impending “fiscal cliff” of tax increases, a slew of competitive new foreclosures that are soon to hit the real estate market, and ongoing high unemployment rates.

In addition, as previously mentioned, HOV is quite volatile, and the stock pays no dividend to offset any pullbacks in its stock price.

For this reason, although I remain bullish on HOV, prudent investors should wait for a pullback before entering full positions, or at least dollar cost average into a position. Investors shouldn’t chase stocks after a big run-up, as HOV has pulled off in the past week, but if you are looking for a solid, long-term investment, Hovnanian continues to stand out among the homebuilders.

As of this writing, Ethan Roberts did not hold a position in any of the aforementioned securities.

  1. HOV: http://studio-5.financialcontent.com/investplace/quote?Symbol=HOV
  2. since my bullish article about it earlier this year: https://investorplace.com/2012/04/keep-an-eye-on-hovnanian/
  3. match or beat First Call analyst estimates of $459 million: http://www.msnbc.msn.com/id/49664736/ns/business-us_business/t/hovnanian-q-revenue-meet-or-beat-predictions/#.UKF3LmeVPMB
  4. DHI: http://studio-5.financialcontent.com/investplace/quote?Symbol=DRI
  5. PHM: http://studio-5.financialcontent.com/investplace/quote?Symbol=PHM

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