Short Squeeze for Housing Stocks?

08/24/2015 8:00 am EST


Andrea Kramer

Associate Editor, Schaeffer's Investment Research, Inc.

Housing has been hot lately; traders are applauding a nearly eight-year high in domestic housing starts, notes Andrea Kramer, analyst with Schaeffer’s Investment Research.

Against this backdrop, we're hunting a handful of housing hotshots to look for potential contrarian opportunities: KB Home (KBH), Ryland Group (RYL), D.R. Horton (DHI), and Lennar (LEN).  

Of the 33 names under our housing umbrella, more than half are trading above their 80-day moving average.  Nevertheless, the number of analyst buy ratings has dwindled. 

Digging into individual equities, KB Home and Ryland Group are the most heavily targeted by shorts, with 16.7% and 15% of their float shorted, respectively.

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, despite the fact that both stocks have outperformed the broader S&P 500 during the past three months.

Analysts aren't convinced, either. KBH boasts just two strong buys, compared to ten 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; its put/call open interest ratio 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 that is just 2 percentage points from an annual peak, implying that option buyers have been placing bearish bets over bullish at a faster-than-usual clip. 

Elsewhere, option bears have also taken quite a shine to D.R. Horton. The stock's 10-day put/call volume ratio registers in the 91st percentile of its annual range.

Similarly, Lennar puts are being picked up at a healthy clip; the equity's 10-day 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.

In conclusion, with signs pointing to life in the US 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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