A $73 Stock Trading for $2.24?

Friday, February 23, 2018

Want to leverage the power of options? Then listen up, because it doesn’t get much better than this…

Hovnanian Enterprises HOV – NYSE is the tenth largest homebuilder in the country. At the height of the housing bubble, HOV was a $73.00 stock. Currently, it trades for $2.24.

Over $4 billion of market value has been wiped out, leaving a current valuation of $314 million. Meanwhile, other homebuilder stocks are up big over the last 52 weeks…

  • Toll Brothers TOL – NYSE is up 42%.
  • PulteGroup PHM – NYSE is up 36%.
  • D.R. Horton DHI – NYSE is up 46%.
  • Lennar LEN – NYSE is up 28%.

So why has HOV underperformed?

Hovnanian is still struggling to get out from underneath a mountain of debt built up during the housing boom. As a result, the company’s bonds are pegged as junk. Plus, a default on an interest payment this past spring rattled investors.

You see, GSO Capital Partners bought credit-default swap contracts that paid out if HOV missed a coupon payment. Then, GSO agreed to refinance Hovnanian’s debt if they agreed to skip a payment — allowing GSO to get paid on their default contracts, and Hovnanian to avoid bankruptcy.

The problem is, the hedge fund on the other side of the trade with GSO (which most likely lost money) contested the deal in court. Although similar transactions have gone through in the past, and Hovnanian defended its role in the deal as a way to strategically manage debt, the stock still dropped nearly 40% this year.

So now is HOV too cheap to ignore?

According to Barron’s, “At these distressed levels, Hovnanian offers an interesting speculative bet, because more than a decade’s worth of problems are reflected in the price.”

An anonymous distressed-company investor said “It doesn’t take a lot to get this stock back to $4.00.”

What could be a future upside trigger?

  • Real Estate Rebound: Construction of new homes increased last month according to the Commerce Department. Also noteworthy, the homebuilding industry built fewer private homes last year than in 1981, when the U.S. population was a third smaller. A rising tide in real estate could finally begin to lift HOV.
  • Legal Resolution: A successful resolution of HOV’s legal issues could bring value investors back into the shares.
  • Profits: Wall Street analysts expect HOV’s earnings per share (-$2.25 in the year to last October) to be -$0.03 this fiscal year and -$0.01 in October 2019. If HOV can beat this expectation — and perhaps even come in positive — shares could significantly bounce.
  • Takeover Talks: On any sort of acquisition rumor, which could certainly trigger at any moment given HOV’s valuation, shares could move smartly higher.

Not only that, but HOV’s past losses have created a massive carry-forward tax loss — up to $2.1 billion in future profits.

From a chart perspective, HOV has been setting a series of rising bottoms, indicating the lows just might be in. With housing purchase prices rising by an average of 6% annually for the past five years, this looks promising.


But how should you play it?

Right now, you can buy the HOV August 1 Calls O:HOV 18H1.00D17 at $1.20 to $1.50 per contract. With the stock currently trading at $2.33, that means you’re paying virtually nothing to carry this position.

Specifically, for every contract you own, you’d have the right to buy 100 shares of HOV for $1.00 per share anytime between now and August 17.

If HOV happens to trade at $4.00 by August, these calls would be worth $3.00, good for a 130% gain. To us, this is a speculation worth making.

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