The Bright Side of a Besieged Builder

04/18/2007 12:00 am EST


Bernie Schaeffer

Chairman and CEO, Schaeffer's Investment Research

Bernie Schaeffer, chairman and CEO of Schaeffer’s Investment Research, says a recent column on WCI Communities suggests a positive contrarian take on the embattled builder.

Barron's Online’s Inside Scoop column recently looked at growing tensions at WCI Communities (NYSE: WCI) as the homebuilder urges shareholders to reject billionaire Carl Icahn's tender offer (see “WCI Communities Shares for Rend,” April 11, subscription required).

In investigating the sale of a 6.6% stake by Hotchkiss & Wiley Capital Management, the article quotes Ben Silverman, director of research at, who states, "I think certainly the selling suggests the stock is as good as it gets right now--that these guys don't feel that there will be a higher offer than $22 per share, and that there is no near-term catalyst in the stock."

A spokesperson for WCI says, "We haven't seen any signs that we have hit the bottom" in its homebuilding operations, noting that the major problem is "a lack of visibility of the downturn of the housing market."

The article concludes with an analyst from JMP Securities says that WCI could be heading "into a downward cycle that could easily last three to five years," while maintaining a "market underperform" rating and $17 price target on the homebuilder.

I respectfully disagree with JMP's analyst, who notes that Carl Icahn's $22-per-share offer for WCI is "good enough," because the analyst doesn't believe that Icahn can add more value. I'm not saying that everything Icahn touches turns to gold, but WCI provides an interesting opportunity.

The homebuilder caters to a "more affluent buyer who takes out a mortgage of 65% to 70% of the cost," just the type of buyer that has not suffered during the subprime meltdown. In addition, WCI is currently riding along its 50-day moving average and its ten-week and 20-week counterparts.

This support is slightly below the $22 level and could help push the stock higher. While the homebuilder has performed well of late, its sentiment is decidedly bearish. Currently, WCI's Schaeffer's put/call open interest ratio (SOIR) of 1.67 is higher than 80% of those taken during the past 52 weeks.

This affords ample opportunity for buying pressure to find its way into the picture and push the stock higher. In addition, five of the six analysts following WCI rate it a "hold" or worse. Any upgrades from this bearish bunch could push the stock higher.

Finally, short sellers are ragingly bearish toward WCI. More than 43% of its float is sold short, and it would take 11 days to buy back these shorted shares at the stock's average daily trading volume. This accumulation could [set the stage] for an impressive short-covering rally on any good news (say, a completed buyout by Carl Icahn). This sentiment mixes with WCI's solid performance to warrant a look from contrarians.

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