Why Hovnanian Stock Just Dropped 10%

MarketsMotley Fool

What happened

One day after shares of homebuilder Hovnanian Enterprises, Inc. (NYSE: HOV) stock surged 11% in response to an earnings report that showed rising gross margins and (by one metric at least) increasing market penetration, Hovnanian stock is heading the other way Friday morning. Earlier today, the stock was down more than 10%. As of 10:55 a.m. EST, Hovnanian stock was spotted down 8.7% and falling once again.

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You can thank the analysts at MKM Partners for that. This morning, MKM railed against the rally in Hovnanian stock, warning that investors are pricing in "unrealistic" expectations for growth and according Hovnanian stock too high a valuation. MKM cut its own rating on Hovnanian stock to "sell" in response -- and investors appear to be taking that advice today.

So what

What is it about Hovnanian that MKM doesn't like? There's no mystery there. Yesterday, Hovnanian reported a 10% drop in fourth-quarter revenue and an even steeper 50% plunge in profits -- just $0.08 per share. Worse, Hovnanian wrapped up the year with a $2.25-per-share loss on $2.45 billion in revenue.

Now what

Hovnanian management gave no specific guidance for what it might earn in fiscal 2018, saying only that "we believe we should be well positioned for growing our deliveries, revenues and profitability in 2019 and beyond." (Emphasis added).

That doesn't bode particularly well for Hovnanian's chances of earning a profit in the new year. Indeed, Wall Street analysts on average are predicting another loss for Hovnanian in 2018 -- albeit a smaller one of only $0.01 per share -- followed by a hopefully break-even year in 2019.

With the Street apparently of the opinion that folks will need to wait until 2020 at the earliest to see Hovnanian earn a profit, investors are canceling their contracts and forfeiting their deposits -- and walking away from Hovnanian stock today.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.