A daily feature available on SchaeffersResearch.com is "Street Chatter." Every day, we'll focus on three newsworthy stocks that are generating a lot of attention on Internet message boards. By digging into the stock's option activity and trading performance, we hope to shed some light on the securities. Appearing in today's Centex, KB Home, Pulte Homes.
CNN.com's headline read "Texas 'ready for the worst' from Rita" this morning, and our television screens in the office showed aerial views of stationary cars on the Texas throughways, as people tried to flee to safety. I cannot imagine what it must be like. I certainly cannot imagine what it must be like, after the storm has passed, to wonder what is left. Hurricane Rita's winds have dropped a little, but a Category 4 hurricane is still rather worrisome.
Across the country, companies of all kinds have been citing Hurricane Katrina as the reason for recent triumphs or disasters. Homebuilders in particular are in the spotlight, and I've taken three of them as my subjects today. It's important to keep a clear head. While rebuilding homes in and around New Orleans is a priority, the only homebuilders who can really help are those that operate in the region. Suggestions from realtors that demand for homes nationally will increase sharply in the aftermath of Katrina, sound a little bit silly.
So, just who is out there to help? Centex (CTX: sentiment, chart, options) is based in Dallas, Texas, and has 55 years of experience behind it. The company builds in Texas, Florida and Georgia, amongst many other states, but not in Louisiana, Mississippi or Alabama, according to its Website.
When Katrina hit on August 29, CTX was rebounding from the support of its 160-day moving average. By September 12, it had gained 9.2 percent and topped out at its 80-day moving average. During the same time period, the S&P 500 Index (SPX) added 3.4 percent.
For the past three days, the stock has tested the 160-day trendline again, pulling clear of it but then falling back, and it's a little hard to guess how this story will end today. My colleague Nick Perry was quoted on the Dow Jones Newswires this morning. "Technically, the bounce in housing seems somewhat anemic," he commented.
Perhaps not coincidentally, the Philadelphia Housing Sector Index (HGX: sentiment, chart, options) is also sitting on its 160-day moving average today.
Zooming out a little, the weekly picture for CTX shows how the stock relied on the 80-week moving average a couple of times in 2004, but then pulled clear, flying solo all the way to a peak that almost touched 80. The 160-day trendline has been far below for a long, long time.
Let's take a look at the sentiment. We regularly track three areas:
From Zacks I see that 13 analysts rate the stock, awarding:
There is a deal of optimism here, but remember that those cautious "hold" ratings are far from neutral, and leave room for upgrades if the stock continues in its current uptrend. From a contrarian perspective, this is good news.
Equities investors have sold about 7.9 million CTX shares short, amounting to more than six percent of the company's float. The short-interest ratio, which measures how long it would take to buy back all the shorted shares at current average trading volumes, is 4.5 days to cover. We monitor short interest because sometimes sudden good news comes along and pushes a stock's price up sharply. This might shake out some of the short sellers, who suddenly see that it will cost more money to buy their stocks back than they tucked under the mattress when they originally sold the positions. If these turncoat short sellers suddenly transform into buyers, they can push the stock price yet higher and perhaps provoke further short covering. We usually take note when the short-interest ratio passes five, so CTX is not currently a prime candidate for a short-covering rally. I see that short interest fell almost five percent in August but remained almost unchanged in September.
Finally, the Schaeffer's put/call open interest ratio (SOIR) today for CTX is 0.93, indicating that puts and calls are more or less equally popular in the closest three calendar months. This figure is lower than 71 percent of readings taken during the past year, indicating optimism. The SOIR has shown little movement for the past two months, suggesting that the options crowd is content to leave things as they stand.
Remember that puts, if present in sufficiently large numbers, can lend options-related support if the stock price is above the strike price of the put. Similarly, calls can lend options-related resistance if their strike is above the equity's price. When the markets opened for trading, the options configuration for CTX for October looked like this:
CTX has a wall of calls at the 70 strike, with plentiful puts at the 60 strike. In the short term, I think the 70 level might pose a challenge for the stock. There appears to be support at 64, and if that give way, the next stop might be 60.
The stock earns itself a Schaeffer's Equity Scorecard reading of 4.5 out of 10 suggesting, by a small margin, that the downside is the more attractive direction.
Our second stock is the Californian company KB Home (KBH: sentiment, chart, options), which is based on Wilshire Boulevard, Los Angeles, and builds in Texas, Florida, and many other sunbelt states (although not in Louisiana, Mississippi or Alabama), plus a trio of northern states, and la belle France.
If you read Chris Johnson's weekly column, Investor's Edge, you probably already know that he turned bearish on the housing sector a couple of weeks ago. Chris is our Director of Quantitative Analysis, and here's what he said this week:
"The housing sector continues to see signs of optimism as it struggles to retain its relative-strength leadership position. The housing sector is the third most "loved" sector (among those we track), as the analyst community has increased its "buy" ratings on this group of stocks, according to data from Zacks.
"Outlook: HGX continues to struggle, having failed to cross back above its 50-day moving average and the 550 mark. With optimism still dominating, the downside appears more favorable. From our perspective, while some opportunities remain among these stocks, there are enough reasons to look at the overall sector with a cautious eye."
So, noting that we're already a little bearish on CTX, and bearish on the housing sector as a whole, what do we have to say on KBH?
When Katrina hit on August 29, KBH hit a low of 69.12. On September 15, it peaked at 77.92, representing a 12.7-percent increase, far outpacing the SPX over the same interval.
The 20-day moving average has kept the stock down over the past three days and the 10-day is swooping down menacingly. There is more than a hint of support at 70, and if we zoom out to the weekly chart, we find confirmation of that theory. Also, the stock is trapped between its 10-week and 20-week moving averages. The latter trendline just reversed into a decline while the former is still steadily rising, so a break below the 20-week would be a sign of weakness, in my opinion.
From Zacks I see that 10 analysts rate the stock, awarding:
The mood here is one of optimism, and that leaves plenty of room for downgrades, and little room for upgrades, suggesting that the stock will need to carry on making major, and preferably monotonic, advances if it is to avoid disappointing the Street.
New short interest figures are just out, and I see an increase of 11 percent in September, bringing the number of shorted KBH shares to 8.7 million, which amounts to more than 11 percent of the stock's float. This is enough to give an upward push to prices from short covering if the short sellers ever had cause to cover their positions in a hurry.
KBH's SOIR checks in at 1.46, indicating that puts are clearly more popular than calls in the nearest three calendar months of options. This SOIR figure is higher than 63 percent of readings taken during the past year, so it reveals a degree of pessimism in the options pits that, as a contrarian, I find encouraging. Nevertheless, the SOIR is declining noticeably, as the following chart shows.
Remember, as contrarians we look for one of the following situations:
KBH's combination of technical performance that is still strong, plus signs of pessimism in the sentiment make it a better bet than CTX, I'd say. The stock earns itself a Schaeffer's Equity Scorecard reading of 5.5 out of 10 suggesting that the upside is a little more attractive than the downside.
When the markets opened for trading, the options configuration for KBH for October looked like this:
The peak front-month put open interest is at the 70 strike, which encourages me. But that wall of calls at the 75 strike don't look good at all. If open interest on that contract increases, KBH could struggle to advance very far.
Moving on, we come to Pulte Homes (PHM: sentiment, chart, options) which is based in Michigan and ranks, according to Hoover's, as the number-two homebuilder in the United States, behind D.R. Horton (DHI).
When Katrina hit on August 29, PHM had slipped below its 80-day moving average, yet by September 15 the stock had surged ahead 12.9 percent. Note that we have seen the same pattern three times here, two to three weeks of decent growth starting on that fateful date.
The daily chart since January troubles me a little. I see signs of support at 42 on the chart, but I notice that the stock has slipped below its 80-day moving average again, and faced rejection there today.
The weekly chart is more reassuring, showing support from the 20-week moving average, but I notice that the equity is pinched between the two trendlines this week, a situation that rarely happens and tends not to last for long, as the chart illustrates. A sharp movements sometime soon would not surprise me.
From Zacks I see that 12 analysts rate the stock, awarding:
We're supposed to pepper our writing with the word "rare" when writing about "strong buy" or "strong sell" ratings, but seven out of 12 "strong buys" just makes "rare" sound wrong.
There is some short selling going on for PHM, with 7.4 percent of the company's float sold short. The Schaeffer's put/call open interest ratio (SOIR) today for the stock is 1.34, which indicates that puts are popular, and lies roughly in the 85th percentile, toward a pessimistic extreme of readings taken during the past 12 months.
When the markets opened for trading, the options configuration for PHM for October looked like this:
The stock earns itself a Schaeffer's Equity Scorecard reading of 6.0 out of 10 suggesting that the upside is a little more attractive than the downside. It's interesting to note that these stocks have been doing well for some time, yet none of them manages to score higher than 6.0 out of 10. As realtors and homebuilders continue to assure us that the picture is rosy, it feels increasingly easy to feel skeptical toward the sector. Perhaps some well-chosen puts might bring profits one day soon.
I'll be back tomorrow with three more stocks that are being talked about. I'm heading off to write some of Market Recap, a feature here at SchaeffersResearch.com that appears every day after the markets close.
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