U.S. House builders behind increased short selling activity

The U.S. Consumer Durables sector is subject to the greatest amount of short selling activity. It has seen the highest number of stocks reaching annual highs in short interest over the past month and a drill down into the sector revealed that house builders represent a third of these. This is hardly surprising given the multi-pronged drag on the sector from high unemployment, low home price appreciation and volatile markets resulting in subdued housing demand. Last week as house builder stocks fell, Goldman Sachs lowered its housing starts forecasts and lowered price targets by 24% click here.

Most Shorted

Short interest across house builders currently stands at an average of 5% of the sector’s total capitalization – above the average across the S&P 500 at 3%. Almost half of the 17 home builder stocks screened have seen short interest reach a new annual high, and the top ten most shorted stocks in this sector (see the Bloomberg screen below) reveal short interest at more than double the sector average. Short interest has been rising in these stocks over the past three months, with the exception of Hovnanian Enterprises and Lennar Corp.

KB Homes, which is currently involved in a dispute over a bankrupt Las Vegas-area development worth at least USD 335 million, is the most shorted stock in its sector, but also has the largest proportion of holdings held by institutional investors. Short interest stands at 33% of the total shares, which is more than double the level at a year ago, but it has been static recently as the share price slides further. This may be due to a lack of supply as two thirds of the stock that is available to be borrowed is already out on loan. Interestingly, the institutional investors who lend are taking a contrarian view and their total holdings stand at an annual high of 37% of the company.

Along with the rest of the sector, Hovnanian Enterprises and Lennar Corp have both been subject to tumbling share prices and are also trading close to annual lows. However, short sellers have been covering their positions in these stocks. Hovnanian has seen short interest fall continuously from an annual high in June of 35% to 25%, but this still represents almost all of the shares that can be borrowed. Short interest in Lennar Corp stands at 12% of total shares.

Highest institutional ownership

Most of the stocks with the largest institutional ownership of funds who lend are generally small cap’ but larger cap’ stocks with more than the sector average of 15.7% of total shares include Pulte Group, DR Horton Inc, Toll brothers and again Hovnanian Enterprises.

Earlier last month The Wall Street Journal reported that Pulte Group, be considering a rights issue to raise funds. The shares reacted negatively and short interest has jumped to a new annual high of 16.5% of total shares. That said, institutional investors who lend continue to invest in the company and have increased holdings continuously over the year. They now hold 30% of the total market cap’.

Institutional investors are heavily invested in Toll Brothers with funds who lend holding 27% of total shares, but these investors have been growing increasingly bearish towards the stock, having reduced holdings by 15% over the past year. Short interest stands at 5% of total shares outstanding, having fallen from 7% in mid-August.