Top 10 Most Shorted Stocks – Lennar Corp.

Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

A recent survey of the top 10 most shorted stocks in the S&P 500 found Lennar Corp. (NYSE: LEN) coming in at #7. The company currently has about 19.67% of its outstanding shares sold short. My contrarian nature makes me think there might be opportunity where others see problems. Let's look at Lennar a little more carefully and see what's going on.


Current Price: $23.33
P/E on '12 earnings: 30.30
Growth expected: 25.52%
PEG: 1.19
Yield: 0.69% 

Like most homebuilders, Lennar is in a tough spot. Foreclosures are attracting new and existing home buyers who might otherwise build new homes. The real estate market, while not falling like before, seems to not have found a bottom yet. Lennar is basically in a war with time. In essence, the company needs to conserve cash to the point where they can ride out this downturn. For most homebuilders it's a question of survival until the housing market shows sustained improvement.

Lennar technically has been on a pretty good run. The stock has been as low as $12.71 in the last six months, and is currently only about 2% off its 52-week high, and it appears to have support at about $21. There are some issues facing Lennar going forward, but from a technical standpoint this does not appear to be a stock to short.

The two biggest issues facing Lennar are negative cash flow and the balance sheet. Lennar in the last four quarters has averaged negative cash flow of about $67 million. They have roughly $2.1 billion in cash and investments, and $4.1 billion in long-term debt. With all of this debt and negative cash flow, the question is how long can the company stick around? If we assume negative cash flow continues at the same rate, the company can last about seven years. Using just cash alone (about $1.3 billion) the company could survive for about five years. Assuming things don't get worse, Lennar should have plenty of cash to ride out this down cycle.

Looking at one direct competitor, PulteGroup (NYSE: PHM) doesn't have the same growth prospects as Lennar and is in a little worse shape otherwise. The company sells a little under $9, which gives it a P/E of about 40. Pulte is only expected to grow by about 5% over the next few years. Pulte has also missed estimates three of the last four quarters. Pulte has a slightly higher cash burn rate, at negative $69 million on average per quarter. In addition, the company has less cash and investments than Lennar with about $1.46 billion. Doing the math, Pulte could last about five years with their current cash and investments. If you take out Pulte's long-term investments, they could last about 4.5 years.

Invariably, Lennar is a bet one way or the other on a housing recovery. If you believe that housing will start to recover within the next 5-7 years then Lennar should be around for the rebound. If you believe housing will be in the dumps for longer than that, then Lennar is a good short candidate. I believe that housing is already setting the table for a recovery. It might not be the housing market we had back in 2007, but Lennar just needs a decent housing market to make plenty of money. With weaker, less capitalized competitors dropping off, there will be fewer homebuilders when the market does turn around. This bodes well for Lennar as they appear to be capitalized enough to ride this out. I'm placing a green thumbs-up CAPScall on LEN to back up my theory. Let me know what you think in the comments section below.

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