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Publication title: "A Shaky Foundation for Hovnanian "
This article takes a bearish view on Hovnanian's (HOV) fundamental and technical abilities, suggesting that now might be a good time to think twice about the homebuilder -- especially as "economic uncertainty and tight credit continue to affect the housing market as a whole." From the author's perspective, HOV's upbeat report of a 27% rise in its fiscal first-quarter net contracts is simply ambiguous, and overshadowed by the "surprisingly weak showing" from the S&P/Case-Shiller Index -- which revealed that U.S. home prices tumbled to their lowest level in seven years in December. As the author sees it, the data "makes it all the more difficult to justify the triple-digit run-up in share price Hovnanian has seen in the past four months."
HOV has been quite an overachiever on the charts lately, skyrocketing to a more than 93% gain so far in 2012. On a relative-strength basis, the stock has outpaced the broader S&P 500 Index (SPX) by over 66% during the past three months. This surge has pushed the shares into the $2.60-$2.80 area, which has provided a backstop for the past several weeks.
With such an impressive run on the charts, bearishly biased brokerages could have a change of heart toward HOV. Among the eight analysts following the stock, Zacks tallies two tepid "holds," six "strong sells," and not a single "buy" rating. Plus, Thomson Reuters places the average 12-month price target at $1.78, which represents a discount to Friday's session high of $2.85.
Elsewhere on Wall Street, there seems to be a glut of negativity already priced into HOV. Short interest ballooned 21% during the past month, and now makes up a hefty 26.7% of the security's available float. At HOV's average pace of trading, it would take over one week to buy back all of these pessimistic positions, which could translate into a fresh source of buying pressure for the equity.
Should HOV extend its stint as a broad-market standout, an unwinding of bearish bets by short sellers, or a fresh round of upgrades and/or price-target hikes, could provide a contrarian tailwind for the home construction issue.