Schaeffer Sees Homebuilder’s Comeback

02/16/2007 12:00 am EST


Bernie Schaeffer

Chairman and CEO, Schaeffer's Investment Research

Bernie Schaeffer is bullish on the markets, but he particularly likes one Florida-based homebuilder, which he thinks has all the bad news already in its share price...

Bernie Schaeffer's 2007 Predictions:

2007 High 2007 Low 2007 Close
Dow Jones Industrial Average 14,750 12,330 14,400
Standard & Poor's 500 1,610 1,400 1,580



Favorite Stock for 2007:
Lennar (LEN)

Despite a very negative earnings revision to begin 2007, shares of Lennar, [a leading Florida-based homebuilder], are actually trading higher this year. That's an indication that the worst is factored into the stock and a sign that the future is much brighter than current expectations [suggest]. Moreover, amid poor housing statistics being reported over the last several months, Lennar and the homebuilding sector have actually rallied from their July 2006 lows [as interest rates continue to be friendly].

For its part, Lennar broke above short-term resistance at the 48 level in November 2006 and is currently trading near nine-month highs [in the 50s]. The shares have been a relative-strength leader in the homebuilding group, out performing the ISE Homebuilders Index (RUF) since September 2005. 

Options players are firmly entrenched in the bearish camp when it comes to Lennar, which we view as bullish within the context of the recent price action. The stock's Schaeffer's put/call open interest ratio (SOIR) recently stood at 1.05, which means there is more put open interest on this stock than call open interest on options expiring within the next three months. 

A high SOIR has been predominant throughout most of the shares' up trend since July. The fact that it remains high suggests that pessimism in the options market has yet to be fully unwound, which could be a source of buying power in the future. Moreover, Lennar stands to benefit from short-covering activity over the course of 2007. Over eight percent of the equity's float has been sold short, and the short-interest ratio (days to cover) stands at seven. 

Finally, analysts on Wall Street are still leery of Lennar, as evidenced by the latest [data from Zacks Investment Research.] Of the 11 brokerage firms ranking the stock, only five have awarded the shares a "buy" rating, while two list it as a "strong sell." A continued upward drive in the shares could spur some upgrade activity, drawing positive attention toward the equity. 

While technical hurdles remain (for example, the 20-month moving average hovers around the 55 mark), there should be enough cash available on the sidelines to [give Lennar the strength it needs] to overcome this threshold and continue rallying over the foreseeable future. 

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