The government is doing everything it can to get banks to lend and to lower interest rates. Mortgage rates are now at a 37-year low, with an average rate of 5.2% for a 30-year mortgage. Applications for mortgages are surging, according to The Wall Street Journal, which may mean that that this is the bottom for lenders and homebuilders.
Some of the homebuilder stocks have dropped as much as 44%, creating short squeeze opportunities. A short squeeze takes place when short-sellers quickly cover their bearish positions on optimistic news, which can move the price of the stock up sharply. The metric for measuring short-squeeze opportunities is the short ratio, also known as the "days-to-cover ratio," which is the number of days it would take the short-sellers to cover their positions based on recent average daily volume of the stock.
Stockpickr has reviewed all the heavily shorted homebuilder stocks and compiled a list of the
top homebuilder short-squeeze plays.
One of the heavily shorted homebuilders is Avatar Holdings (AVTR), which is involved in residential development in Florida and Arizona, two of the states hardest-hit by the housing slump. The stock has a short ratio of 7.9, which means that it would take the short sellers about eight days to cover their positions, based on recent trading volume. With the stock down 27% for the year, any positive news could send the stock sharply higher. Although the company has generated negative earnings, the stock is selling for less than half its book value of $58 per share, and it has about $18 in cash per share.
Avatar is owned by Tweedy Browne, an investment company that utilizes the Graham-Dodd approach to investing, and looks for stocks that are trading at a significant discount to intrinsic value. Tweedy Browne also owns American Express (AXP), with a P/E ratio of 6.5 and PEG ratio of 0.8; The Home Depot (HD), with a P/E ratio of 13 and a PEG ratio of 1.4; and Wal-Mart Stores(WMT), with a P/E of 16 and a PEG of 1.4.
Another homebuilder with extensive short interest is NVR(NVR), which builds single-family detached homes, town homes, and condos in various states including Maryland, Virginia, West Virginia, Pennsylvania, New York, North Carolina, South Carolina, Ohio, New Jersey, Delaware and Kentucky, has a short ratio of 4.6. In October, the president of the company, William Inman, dumped 10,000 shares of the company's stock, totaling more than $5 million. However, Dwight Schar, the executive chairman, has decided to voluntarily forego a base salary and bonus. It is one of the few homebuilders to generate profits, with a P/E of 13 and a PEG ratio of 1.7. Its major competitors don't even have P/Es or PEGs, as they aren't generating any earnings.
NVR shows up in the portfolio of the Schneider Small Cap Value Fund, which invests in smaller-cap stocks that it believes are undervalued. This Morningstar-rated three-star fund has been up in seven out of the last nine years. Also in the portfolio is Navistar International (NAV), with a low P/E of 5 and an extremely low PEG of 0.1, and American Medical Systems Holdings (AMMD), with a P.E of 27 and a PEG of 0.7.
For more ideas, check out the portfolio of the top home builder short-squeeze plays at Stockpickr.com.
For more ideas, check out the portfolio of the
