Roof Leaker To Watch: KB Home (KBH)

Editor's Note: Any reference to TheStreet Ratings and its underlying recommendation does not reflect the opinion of TheStreet, Inc. or any of its contributors including Jim Cramer or Stephanie Link.

Trade-Ideas LLC identified KB Home ( KBH) as a "roof leaker" (crossing below the 200-day simple moving average on higher than normal relative volume) candidate. In addition to specific proprietary factors, Trade-Ideas identified KB Home as such a stock due to the following factors:

  • KBH has an average dollar-volume (as measured by average daily share volume multiplied by share price) of $79.9 million.
  • KBH has traded 1.3 million shares today.
  • KBH is trading at 1.88 times the normal volume for the stock at this time of day.
  • KBH crossed below its 200-day simple moving average.

'Roof Leaker' stocks are worth watching because trading stocks that begin to experience a breakdown can lead to potentially massive losses. Once psychological and technical resistance barriers like the 200-day moving average are breached on higher than normal relative volume, the stock may then be subject to emotional selling from investors that can continue to drive the stock lower. Regardless of the impetus behind the price and volume action, when a stock moves with weakness and volume it can indicate the start of a new, potentially dangerous, trend.

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More details on KBH:

KB Home is engaged in homebuilding activities in the United States. It constructs and sells various homes, including attached and detached single-family residential homes, townhomes, and condominiums primarily for first-time, move-up, and active adult homebuyers. The stock currently has a dividend yield of 0.5%. KBH has a PE ratio of 41.3. Currently there are 3 analysts that rate KB Home a buy, 5 analysts rate it a sell, and 7 rate it a hold.

The average volume for KB Home has been 3.8 million shares per day over the past 30 days. KB Home has a market cap of $1.6 billion and is part of the industrial goods sector and materials & construction industry. The stock has a beta of 2.35 and a short float of 41% with 4.99 days to cover. Shares are up 4% year-to-date as of the close of trading on Friday.

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TheStreetRatings.com Analysis:

TheStreet Quant Ratings rates KB Home as a hold. The company's strengths can be seen in multiple areas, such as its impressive record of earnings per share growth, compelling growth in net income and revenue growth. However, as a counter to these strengths, we also find weaknesses including a generally disappointing performance in the stock itself, generally higher debt management risk and weak operating cash flow.

Highlights from the ratings report include:
  • KB HOME reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. This trend suggests that the performance of the business is improving. During the past fiscal year, KB HOME turned its bottom line around by earning $0.41 versus -$0.76 in the prior year. This year, the market expects an improvement in earnings ($1.22 versus $0.41).
  • The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Household Durables industry. The net income increased by 264.0% when compared to the same quarter one year prior, rising from $7.72 million to $28.12 million.
  • In its most recent trading session, KBH has closed at a price level that was not very different from its closing price of one year earlier. This is probably due to its weak earnings growth as well as other mixed factors. Looking ahead, other than the push or pull of the broad market, we do not see anything in the company's numbers that may help reverse the decline experienced over the past 12 months. Despite the past decline, the stock is still selling for more than most others in its industry.
  • The debt-to-equity ratio is very high at 4.01 and currently higher than the industry average, implying increased risk associated with the management of debt levels within the company.

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