Wednesday, March 28, 2007

Calls of Note Part 1

- Goldman Sachs maintains their Neutral coverage view on the Homebuilder sector as they believe the stocks are unlikely to rally sharply from current levels despite many larger-cap stocks bumping up against an historical entry point of 1.0X price-to-book value (P/BV). Weak order activity from Lennar reported yesterday coupled with comments from management that the Spring selling season pick-up has not come through as hoped are likely to weigh on investor sentiment, off-setting the potentially enticing stock valuations.

Beazer Homes (NYSE:BZH) responded to news reports last night that it is the subject of a
widespread investigation involving lending practices as laid out in recent articles published by the Charlotte Observer. Although Beazer denied the allegations of wrong-doing as outlined by the Charlotte Observer stressing that it has acted as a mortgage originator, not an underwriter, the presence of such allegations coupled with comments attributed to an FBI agent on the investigation are likely to weigh on Beazer shares. With the stock trading at 0.75X P/BV prior to last night's reports, the firm maintains their Neutral rating on BZH shares.

Notablecalls: BZH was down over 5 pts in after hours action. That's a 17% haircut on some pretty vague investigation news. Given the almost 20% short interest, I'm inclined to believe the stock was pushed down. OK, for example's sake, let's say youre an institutional trader with a 300K short position in the name. 20 minutes after the close the CNBC reports of potential FBI investigation at BZH. You take a deep breath, switch on your ECN platform and use another 30-50K stock to push BZH down in after hours, hoping some of it will stick on open. As you hit the bids, the stock goes down as noone is willing to set up in front of a potential investigation. If youre lucky, the analyst community will reiterate their cautious stance in the morning and you can easily cover your 300K shares for an extra 5 pt profit. Heck, why not go long 50K after youre done covering! BZH's valuation's way below that of peers and once the panic sellers are done the stock will probably squeeze higher.

Anyway, I suspect the $26 level reached in after hours may provide a nice s-t bounce oppy for aggressive accounts.

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