JMP takes a look at Hovnanian stock -- and sees a tear-down. Image source: Getty Images.
Shares of homebuilder Hovnanian Enterprises (NYSE: HOV)dropped more than 11% in early Thursday trading, before rebounding to a recent loss of only 8.5% as of 12:30 p.m. EST.
For this, you can blame the not-so-friendly analysts at JMP Securities, which this morning pulled their already underwhelming market perform rating from Hovnanian stock, and downgraded the shares to market underperform (aka "sell"). As detailed in a write-up on StreetInsider.com this morning, JMP observes that Hovnanian shares have spiked 66% over the last 90 days -- a time period that has seen the broader S&P 500 rise just 6%.
JMP believes that this huge surge in stock price is "overdone" -- the more so because "1H17 has extremely difficult community count comps, leading us to believe management's 2018 guidance of a recovery toward 2016 delivery levels is too optimistic." Five years after the housing market pulled itself out of a ditch, Hovnanian still isn't earning profits. Moreover, most analysts quoted on S&P Global Market Intelligence expect to see Hovnanian's losses increase over the next five years.
JMP also highlights Hovnanian's "cumbersome debt load and land banking arrangements as a material negative."
Between the balance sheet risk and likely losses on the income statement, JMP argues that Hovnanian should be valued at best at "8.0x our 2018 EPS estimate versus [its peers' valuation of] approximately 9.5x." JMP estimates that 2018 earnings will be in the neighborhood of $0.20 per share (which is in line with other analysts' expectations) and thus assigns Hovnanian stock a price target of just $1.60.
Given that that price target is 36% below the price of Hovnanian stock even after today's sell-off, today's selling could be only the beginning.
10 stocks we like better than Hovnanian Enterprises When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Hovnanian Enterprises wasn't one of them! That's right -- they think these 10 stocks are even better buys.
Click here to learn about these picks!
*Stock Advisor returns as of January 4, 2017
Fool contributorRich Smithdoes not own shares of, nor is he short, any company named above. You can find him onMotley Fool CAPS, publicly pontificating under the handleTMFDitty, where he currently ranks No. 358 out of more than 75,000 rated members.The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.