Is Hovnanian Enterprises the Ideal Boomerang Stock?

With shares of Hovnanian Enterprises (NYSE:HOV) trading at around $6.76, is HOV an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Hovnanian Enterprises designs, constructs, markets, and sells residential homes in the United States. This company also provides financial services. The stock popped 14 percent on Friday, which was most likely related to option activity, especially considering the 2 percent drop so far today. However, if you have owned the stock over the past year, then today’s 2 percent drop is nothing more than a gnat on your windshield. Just wipe it away and keep humming along. It’s amazing to think that Hovnanian Enterprises traded at only $1.29 this year. If you bought at that price, then you are the trading equivalent to the coolest and most interesting man in the world (see Dos Equis commercials for more information.) Or you’re just very lucky. Regardless of where you bought the stock, the only thing that matters now is the future.

Hovnanian Enterprises has several positives at the moment. Net contracts are up 19 percent, net backlog is up 29 percent, their prices have increased in 60 percent of communities this year, and they reported their first pre-tax quarterly profit since 2006. Of course, there was also a purpose for the word “boomerang” in the title. People who had lost their homes to foreclosures in the past are now back in the market. Hovnanian Enterprises refers to this as boomerang buying, which is a catchy phrase. Even if Hovnanian Enterprises falls flat on its face in 2013, we can at least credit the company for its creativity.

Catalysts are critical to discovering winning stocks. Check out our newest CHEAT SHEET stock picks now.

On the negative side, Hovnanian Enterprises has to deal with a considerable amount of debt, their profit margin is -4.46 percent, and 46.80 percent of the float is short. In many cases, a short position is a positive because of the potential for a short squeeze, but this number is extremely high, which means there are a lot of people who aren’t confident in the future prospects for Hovnanian Enterprises. We’ll get to more on this company’s situation and potential soon. For now, let’s take a look at some important numbers.