Perhaps the biggest bubble by actual dollar value in the history of the world was the housing bubble that exploded in 2008. It seems every market was hit and the homebuilders, who were the darlings of Wall Street in the early part of the 2000's were all of a sudden the toxin of all ages. All of the bailouts of 2008 and 2009 started with those who invested in real estate; among the worst hit were the homebuilders. For most of the last 5 years the homebuilders were languishing in the proverbial basement while the rest of Wall Street rebounded. However, over the last 2 years the homebuilders have shown life again. With perhaps one of the smallest, but most forceful companies being Comstock Holdings (NASDAQ:CHCI).
Comstock is taking advantage of several competitive strategic decisions they have made over the years. One of the most important aspects of the potential success of Comstock is the market in which they operate. Comstock by its very nature is a small operator. However, they have chosen to center operations on the communities and areas surrounding Washington DC. The advantage here is that Washington has been one of the most stable and least impacted real estate markets in the US. Since the real estate bubble crash, where nearly every location had witnessed price drops of significant proportions DC saw prices stabilize and even show some upticks. The most current data suggest that the average price of homes in this area are still in the multiple hundreds of thousands. This fact represents one of Comstock's long term strategies to concentrate on one market.
A more short term catalyst for Comstock's stock is the time of year. Spring has traditionally been the best time of the year for home sales. Whether it is because people are coming out of their winter quarters with money saved up or tax refunds to add to down payments; spring is when homes sell. Homebuilders have seen this trend for decades and spend a great deal of effort to make this time the best time to buy homes. Special marketing and sales programs go into effect and homebuilders plan their whole year around this time.
Reviewing Comstock's financial tables for the most recent quarter (November, 2013) the company has been increasing revenues by leaps and bounds. In fact, the year over year growth has been outstanding. In November the revenue growth was over 300%. Looking at these numbers for the first nine months, the company averaged growth that was in the triple digits. In these same documents the company spoke of focusing their attention to maintain these growth figures for the long term as well.
The following is from a recent (Feb 7th 2014) Comstock press release:
- Homebuilding revenue increased 364% to approximately $53.8 million from $11.6 million in 2012;
- New orders increased 147% to 126 units, compared to 51 units in 2012;
- Unit deliveries increased 138% to 107, compared to 45 unit deliveries in 2012;
- Backlog at year-end 2013 of 28 units valued at $12.3 million, compared to nine units valued at $5.4 million at year-end 2012;
- Community count increased to ten at year-end 2013 from five at year-end 2012;
- Comstocks pipeline of controlled land inventory expanded to approximately 637 lots at year-end 2013 from 354 lots at year-end 2012.
Potential For a Short Squeeze
Both a fundamental and technical aspect of Comstock's stock price is the fact that the company has a huge portion of its outstanding shares short. Currently, 30% of the float has been shorted (according to this). If the company reports even a modest surprise in its next report (the annual reports should be released within the next 2 weeks or so) a large portion of the shorts could be forced to cover. This could happen very rapidly and cause the price to rise dramatically. In fact, while not reported above; the average volume has increased, indicating that the weaker shorts are already getting shaky.
Now not everything is peaches and cream for Comstock. It does have one definite draw back, that being a large amount of its most recent revenues have been because of non-controlling interest (NYSE:NCI) accounts. While not always a negative sign, the fact is the NCI has placed the income into the loss segment. GAAP procedures require NCI to be taken out since it is not always a result of the management team's performance. This large NCI does cause some caution on the stock.
Technical or stock valuation Analysis
In looking to the relationship of the stock price to determine the market's view of a stock (technical analysis) one can often build an advantage into their investment strategy. Professional stock traders do this all the time and it is a very helpful tool to maximize profits.
In the case of Comstock, the time of year is one of the prominent indicators its might be time to buy. As mentioned previously the homebuilders' bestselling time is often the spring time. Investors have seen this and will most of the time increase their holdings of real estate stocks to take advantage of this consumer phenomenon. In fact, looking at the chart of Comstock for the last 5 years shows this, as April often sees an appreciation in the stock's price.
Note that some of big moves below on the monthly chart were in the spring months:
Actually, the best moves that the stock has seen in the last five years have happened in the spring. With April being one of the months to see prices appreciation. Sometimes the returns in this time period measure above 200% return within one month's duration. Add to this historical price jump the fact that the company has a huge short interest and this year potential jump could be very large, especially if the company beats expectations.
On a longer term basis the company has for the last year shown that it is seeing increasing revenue. If this aspect can be sustained for the next several years the price would go higher based on EPS appreciation. This prospect would seem to have support based on a more normalized real estate market. If the real estate market returns to a more normal period, then the price of the stock could jump to a more normal trading range too.
Comstock Holdings has several positives going for it. On the fundamental side of the ledger the company has been showing increased revenues from projects. It has maintained its focus on one of the best real estate markets in the country the Washington DC metro region. The company has an extremely high short interest, with even a modest positive event the shorts could be scared out of the company. Finally, given the time period of spring the company could see increasing sales and point to higher revenues push more shorts to cover.
Disclosure: I am long CHCI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Editor's Note: This article covers a stock trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.