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Option Idea of the Week: KB Home (KBH)

KBH looks ripe for more upside

by 2/14/2014 11:15:53 AM
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U.S. housing starts increased a year-over-year 18.3% in 2013, the Commerce Department reported last month, with home construction touching multi-year highs. Among the companies benefiting from the post-recession bounce is KB Home (NYSE:KBH), an. L.A.-based homebuilder that's trended steadily higher on the charts.

Since skimming the $15.50 level in mid-November, KBH has added more than 20%, and was last seen at $18.61. Underscoring the stock's series of higher highs and higher lows has been its ascending 40-day moving average. In fact, the security recently pulled back to this trendline -- a move that's generated five-day gains of 4.2%, on average, in the past eight occurrences, according to data from Schaeffer's Senior Quantitative Analyst Rocky White. As such, and considering there's still plenty of room for more buyers on the bandwagon, now looks like an opportune time to jump in on KBH's longer-term rally.

Daily Chart of KBH since November 2013 with 40-Day Moving Average

Compared to the S&P 500 Index (SPX), KB Home has outperformed the broader equities market by nearly 10 percentage points during the last three months. Nevertheless, Wall Street remains skeptical of the shares. Of the 15 analysts following the stock, only three have doled out "buy" or better endorsements, compared to seven "holds" and five "sell" or worse ratings. Likewise, the consensus 12-month price target of $18.86 is just a stone's throw from KBH's current price. A wave of upgrades and/or price-target boosts could add contrarian fuel to the equity's fire.

Elsewhere, short interest grew 2% during the most recent reporting period, and now accounts for a massive 32.1% of KBH's total available float. In fact, it would take nearly a week to repurchase all of these pessimistic positions, at the stock's average daily trading volume. Should KB Home extend its climb, a short squeeze could translate into a contrarian boon.

Speculators interested in gambling on more upside for KB Home (NYSE:KBH) might consider buying the in-the-money July 15 call, which was last asked at $4.40.

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