Trade of the Day: Hovnanian Enterprises (HOV)

The residential construction group took a huge hit earlier this year when one of its smaller constituents fumbled its profits. From the way other neighborhood developers have maintained their margins, I suspect the risk of contagion is lower than Wall Street initially feared. While entry-level buyers are scarce, competition for contracts does not seem to be forcing many builders to offer concessions to more established homeowners looking to trade up.
In this context, homebuilder stocks like Hovnanian Enterprises, Inc. (HOV) look cheap even if the housing market simply keeps muddling along through spring. I’m not so sure that’s going to happen, but that’s beside the point.
Hovnanian’s center of gravity remains east of Indiana, with most open inventory in California and Texas limited to high-end housing. While Texas might be a risk factor, inventory there is relatively small, concentrated in the more economically diversified markets of Galveston and Houston. Galveston is not shale country, and Houston is the heart of the “new” Texas, where resource extraction now only accounts for 3% of all employment.
None of this seems to argue for the 7% haircut HOV has seen in March — and Wall Street seems to agree. Although the wide float and low share price make the math for earnings per share tricky, analysts have only reined in their net-earnings estimates by 0.7% since West Coast counterpart KB Home (KBH) sent up the flares on Jan. 13. They may all be grossly wrong, but they’ve had plenty of time now to adjust their models.
If they’re on track, all HOV needs to do is hit their $4.07 consensus price target in the next few months to get within sight of scoring a solid win.
The stock has also been caught up recently in news that February was a not-so-great month for housing construction. I believe this was largely due to the weather, but I’ll be watching closely for any signs of catch-up activity as the spring thaw moves across the company’s core markets in the Northeast United States.
Meanwhile, the chart already seems to be recovering.

The stock’s Moving Average Convergence Divergence (MACD) line is approaching a bullish signal cross, and the Relative Strength Index (RSI) is bouncing out of near-oversold weakness.
What I like about this company has not changed. This is a stock for which the worst-case scenario is already priced in, giving it a multiple below 2X trailing earnings and a doomsday forward valuation that’s still roughly 50% discounted to the broad market. While the stock is certainly vulnerable to housing market sentiment, this remains a well-managed company with a chart that looks ready to make its next run.

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