Is Now the Time to Strike On These 4 Housing Stocks?

Skepticism still surrounds homebuilders, including KBH, RYL, DHI, and LEN

Aug 18, 2015 at 2:25 PM
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Housing has been hot lately. Just yesterday, a near-decade high in homebuilder sentiment helped U.S. stocks claw their way out of the red. Today, traders are applauding a nearly eight-year high in domestic housing starts and an encouraging outlook from Home Depot Inc (NYSE:HD). Against this backdrop, we're hunting a handful of housing hotshots to look for potential contrarian opportunities: KB Home (NYSE:KBH), Ryland Group Inc (NYSE:RYL), D.R. Horton, Inc. (NYSE:DHI), and Lennar Corporation (NYSE:LEN) 

According to our most recent Sector Scorecard -- featuring data from our incomparable senior quantitative analyst, Rocky White -- builders have been second to only biotech over the past year. The iShares U.S. Home Construction ETF (ITB) has added over 23% during the past 52 weeks, and just today notched an eight-year high of $29.86. 

Of the 33 names under our housing umbrella, more than half are trading above their 80-day moving average, and the average 52-week return was nearly 10%, as of last week. Nevertheless, the number of analyst "buy" ratings has dwindled in the same time frame, and the average time to cover short positions is more than a week. 

Digging into individual equities, KB Home (NYSE:KBH) and Ryland Group Inc (NYSE:RYL) are the most heavily targeted by shorts, with 16.7% and 15% of their float shorted, respectively. At the stocks' average pace of trading, it would take the bears a week to buy back all their shorted KBH shares, and more than two weeks to repurchase their pessimistic positions on RYL. 

This, despite the fact that both stocks have outperformed the broader S&P 500 Index (SPX) during the past three months, and RYL is up more than 22% year-to-date. Analysts aren't convinced, either. KBH boasts just two "strong buys," compared to 10 tepid "holds" and two "strong sells." Meanwhile, just half the analysts following RYL consider it worthy of a "buy" or better endorsement. 

Plus, short-term option traders are more bearishly biased than usual on KBH. The stock's Schaeffer's put/call open interest ratio (SOIR) of 0.77 stands higher than 85% of all other readings from the past year. Likewise, RYL sports a 10-day put/call volume ratio of 13 on the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). This ratio sits 2 percentage points from an annual peak, implying that option buyers have been placing bearish bets over bullish at a faster-than-usual clip during the past two weeks. 

Elsewhere, option bears have also taken quite a shine to D.R. Horton, Inc. (NYSE:DHI). The stock's 10-day ISE/CBOE/PHLX put/call volume ratio of 2.60 registers in the 91st percentile of its annual range. Similarly, Lennar Corporation (NYSE:LEN) puts are being picked up at a healthy clip; the equity's 10-day ISE/CBOE/PHLX put/call volume ratio of 1.71 stands higher than 92% of all other readings from the past year. 

Meanwhile, more than half the analysts following the duo maintain lukewarm "hold" opinions, and it would take nearly two weeks to buy back all the shorted LEN shares, at the equity's average pace of trading. 

As with RYL and KBH, DHI and LEN have outperformed the broader equities market during the past three months. DHI just touched a nine-year peak of $32.16 earlier today, and LEN is up 3.3% and just off a post-recession high of $56.01, following the lead of sector peer Toll Brothers Inc (NYSE:TOL). 

In conclusion, with signs pointing to life in the U.S. housing market, and with homebuilders paving a path to new highs, the lingering skepticism surrounding the sector seems overdone. A short squeeze, a round of upbeat analyst attention, and/or a mass exodus of option bears could add fuel to the stocks' fire.


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