The U.S. Homebuilders Sector had a very strong 2017 as seen by the $1.8 billion iShares Home Construction ETF (ITB) up 59% on the year. As expected, short sellers in the Homebuilders Sector did not fare well, total short interest in the sector climbed to $4.5 billion with $4.1 billion of short sellers in the top twenty-five most shorted stocks in the sector down $1.52 billion of year-to-date mark-to-market losses , down -53.03%. Homebuilder shorts are making back some of their 2017 losses this year, up $282 million in year-to-date mark-to market profits, up 6.24%.
While short interest in the overall Homebuilders Sector has decreased by $819 million over the last month, short interest in Lennar Group (LEN) has increased by $228 million. Part of the reason is due to merger arbitrage activity related to their $9.2 billion acquisition of CalAtlantic Group (CAA) which was announced late October 2017 and closed this week. The increase in Lennar’s short interest due to this merger arbitrage activity should begin to roll off and provide upside pressure in the name. Lennar’s, PulteGroup’s (PHM) and Dr Horton’s (DHI) short interest levels have been within $150 million of each other prior to Lennar’s M&A activity so we can expect over $1 billion of Lennar short covering to be executed in the near future.
With the added buy pressure pushing up Lennar’s stock price, due to 15-20 million shares of short exposure ready to be closed out resulting from the completion of the CalAtlantic merger we could see Lennar outperforming its peers in the short term. If we do not see Lennar’s short interest drop dramatically, then short interest was not due to merger arbitrage trading, but rather short sellers aggressively targeting Lennar as the weakest stock in the sector.
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Managing Director Predictive Analytics, S3 Partners, LLC
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