A Closer Look at Housing

12/08/2006 12:00 am EST


Bernie Schaeffer

Chairman and CEO, Schaeffer's Investment Research

Tech whiz Bernie Schaeffer looks behind the current brouhaha surrounding the 'bubbly' housing sector. In a recent posting, he tells his subscribers how to play this downtrodden market from an experienced contrarian's point of view.

"Buy (to open) the shares of Lennar (LEN NYSE) at a maximum entry price of $53.50. The target price is $62.00. The stop-loss recommendation is $49.00. Hoovers cites Lennar as one of the largest homebuilding, land-owning, loan-making companies in the US. Along with Centex and Pulte Homes, Lennar is in the top tier of homebuilders, building roughly 36,200 homes annually for first-time buyers and "move-up" buyers. 

"The company also develops age-restricted active adult communities for retirees and empty-nesters in more than 12 states. Home prices range from roughly $100,000 to more than $1 million, averaging $311,000.

"Even with recent negative earnings revisions and poor housing numbers, homebuilding stocks have rallied from their July 2006 lows thanks to a continuing "interest-rate friendly" environment. In addition, a great deal of negative sentiment exists in the media, implying more negative news is priced into these as negative sentiment has hit a saturation point. Moreover, the table is set for positive surprises to emerge. Any such action could make LEN very attractive to valuation players, as its price-earnings ratio is around its lowest level in seven years.

"LEN shares appear to have bottomed in July 2006 after a long decline from the July 2005 peak. The low of $38.66 was just above the "half high" of its July 2005 peak of $68.86. The bottom in July occurred around $40, which also marked its bottom in July 2004. Lennar is a relative-strength leader when compared to its peers in the ISE Homebuilders Index (RUF) outpacing RUF on a monthly relative-strength basis since September 2005.

"Lennar could find a measure of support from its 80-day moving average, currently around $46 and rising. This trendline acted as resistance as the shares attempted to sustain a rally in August 2006. However, since its September move above this average, it has provided support during various consolidations and pullbacks.

"The speculative options crowd is bearish, resulting in Lennar's Schaeffer's put/call open interest ratio of 1.18, a 52-week high. Although short interest declined slightly in November, ample opportunity exists for a short-covering rally as nearly 9% of Lennar's float is sold short. Furthermore, it would take more than five days to buy back the shorted shares at the firm's average daily trading volume. In addition, upgrade potential is ample; only five of the 12 analysts following the shares have "buys". The homebuilding group was upgraded recently by a major brokerage house."

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