Kevin Kennedy uses a momentum-based strategy to look for strong stocks that have broken out to new highs and then pulled back 20% or more, in what he expects will be a temporary correction. In his Coolcat Report, he looks at a homebuilder that has followed this pattern.
Hovnanian Enterprises (HOV), one of the nation's largest homebuilders, rode the housing boom to an almost 1,500% gain between the end of 2000 and its peak of $73.40 in July 2005.
From there it plunged to penny-stock status in both 2009 and 2011 as the housing market ground to a halt, hitting bottom at 89 cents per share in October 2011 before bouncing smartly as the economy began to stabilize.
The stock jumped 383% in 2012, but lost 5% last year and is down another 25% this year, making a new low at $4.36 in April and trading down to the same range in both May and June.
It hit $4.35 on June 17, but jumped 19% the following week on an average trade of almost six million shares per day, nearly triple the average from the previous week.
Sparking the move was a six and a half year high in consumer confidence numbers and a couple of eye-popping housing reports showing big gains in both new and previously-owned home sales. Option activity indicating that many see Hovnanian as a cheap way to play a rebound on the sector also helped boost buying.
The company’s second-quarter earning report in June received a lukewarm reception. The company reported a 6% increase in revenues to $449 million, but a small gain the year before turned into a loss of $7.9 million, or 5 cents per share.
The company said it signed 728 net contracts in March, the highest level of activity since April 2008; the company has a growing backlog and sees continued revenue growth leading to profitability in the second half of fiscal 2014 and an overall profit for the full year.
The stock is 27% off its high. It’s only 14% above its low and remains just below its 200-day moving average, so it might be a little early to get excited. But the recent volume and bounce off the lows offers a pretty low-risk entry in any case.
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