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.