AV Homes, Inc (AVHI) is engaged in the business of homebuilding and community development in Florida, Arizona and the Carolinas. AVHI is a...

Weekly Superstock Scan 30 May2016 - 3 Jun 2016: AVHI

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AV Homes, Inc (AVHI) is engaged in the business of homebuilding and community development in Florida, Arizona and the Carolinas. AVHI is also engage to a limited degree in other real estate activities, such as the operation of amenities and the sale of land for third-party development. AVHI also manages their business through three reportable segments: Florida, Arizona and the Carolinas.

Within each geographical segment, AVHI build both active adult communities, which are restricted to homeowners that are age 55 and older, and primary residential communities, which are open to all ages.


Technical


Breakout from Flat Base with RSI breakout


AVHI has been trading in a narrow range since March. Last week, price broke out of the flat base. While the candle looks relatively strong, the breakout was accompanied by average volume only.

The RSI adds on to the bullishness as the RSI brokeout above the 50 level, which was tested at least 3 times since November last year. 

Volatility Contraction Pattern (VCP)


On the daily chart, AVHI displayed the classic characteristics of Mark Minervini's VCP pattern since March - price moves in a tighter range with declining volume. Nonetheless price is not in an uptrend. Most importantly, the breakout was weak. Not only volume was merely average, but the breakout candle was a doji, indicating market indecisiveness.


Fundamental



Twofold Benefits from Acquisition of Bonterra Builders

In July 2015, AVHI acquired Bonterra Builders, LLC, a constructor of single-family homes in the Charlotte, North Carolina area. The acquisition will enhances AVHI's position in a key growth market with the 1,700 lots owned by Bonterra. 

The benefits of the acquisition are twofold. The first is the direct effect on sales from Bonterra's lots. In the recent quarter, Carolinas closing was 96 units versus 5 a year ago primarily as a result of the acquisition of Bonterra Builders.

The next benefit is the indirect effect of lower costs with larger scale of operations. AVHI is able to leverage on its size and scale on various house cost components such as cabinets, roofing materials, lighting fixtures, HVAC equipment and plumbing fixtures to help improve margins or offset the impact of increasing industry cost pressures. The larger scale has also brought down the selling, general and administrative expenses as a percentage of revenue, allowing AVHI to earn high margins.

Increase in Backlog

The backlog of housing contracts as of March 31, 2016 compared to March 31, 2015 increased by 450 or 74.6%, and the dollar value of backlog increased by $170.1 million or 103.2% over the same period. It is notable that the increase in backlog is not contributed mainly by the acquisition of Bonterra as the backlog increased for all three segments. In particular, Arizona's backlog more than doubled year on year. Backlog is an important indicator of home closings and homebuilding revenues in future periods.


Risk Factors/ Things I do not Like

  • High Valuation - Based on the trailing twelve months earnings, AVHI is trading at close to 17x earnings. Compared to other homebuilders, it is on the high side. AVHI would need to continue to keep its growth at a high rate and even so most of the catalyst may be already priced in the high valuation.


Potential trade setup


Due to the low volume at breakout, the probability of a false breakout is high. A good thing is that the price is not too far above the top of the flat base. Instead of waiting for a pullback, I will enter a stop buy order above the daily high. If it does break above the daily high, at least there is some short term momentum that will pull the stock further up in the short run till the next earning release.

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Previous Superstocks


EHTH (Posted on 15th May 2016 Watchlist)
Pulled back a little, waiting for consolidation

GDEN (Posted on 24th Apr 2016 Watchlist)
May enter at $12

EXFO (Posted on 10th Apr 2016 Watchlist)
Entered @ 3.8. Added @ 3.9 last week.

BORN (Posted on 3rd Apr 2016 Watchlist)
Bounced very nicely with good earnings

PLPM (Posted on 27th Mar 2016 Watchlist)
Pulled back slightly with big volume. Will look for possible entry at 10wMA

SNC (Posted on 6th Mar 2016 Watchlist)
Entered @ 11.95. Closed just above the gap and 30wMA, will add if bounce off from here.

EDUC (Posted on 24th Jan 2016 Watchlist)
Entered @ 9.95. Disastrous week, will exit trade.

VRA (Posted on 11th Jan 2016 Watchlist)
Entered @ 14.4 and Exited at 17.25. Closed just below 30wMA, will cease coverage if 30wMA not reclaimed.


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