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Bear of the Day: NVR, Inc. (NVR)

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NVR, Inc. (NVR - Free Report) , a Zacks Rank #5 (Strong Sell) stock, operates as a homebuilder in the United States. The company is engaged in the construction and sale of single-family detached homes, townhomes, and condominium buildings under the Ryan Homes, NVHomes, and Heartland Homes brands. NVR also provides mortgage-related services and brokers title insurance services. NVR, Inc. was founded in 1980 and is headquartered in Reston, VA.

The Zacks Rundown

NVR has been grappling with industry-wide supply chain issues, inflationary pressures, and municipal delays that have impacted housing affordability. The homebuilding industry has begun to see slowing housing demand, and in the second quarter NVR saw new orders plummet 16%. Cancellation rates also skyrocketed to 14% from 8% in the same quarter from the prior year.

NVR shares experienced a climax top late last year and have been in a sustained downtrend ever since. The stock has hit a series of 52-week lows this year and represents a compelling short opportunity as the market continues its volatile movement in 2022.

NVR is part of the Zacks Building Products – Home Builders industry group, which currently ranks in the bottom 8% out of approximately 250 industries. Because this industry is ranked in the bottom half of all Zacks Ranked Industries, we expect it to underperform the market over the next 3 to 6 months. Also note the unfavorable valuation characteristics for this group below:

Zacks Investment Research
Image Source: Zacks Investment Research

Candidates in the bottom half of industry groups can often represent solid potential short candidates. While individual stocks have the ability to outperform even when included in poor-performing industries, their industry association serves as a headwind for any potential rallies. NVR is fighting against a downward trending housing market and the stock is confirming this notion as it continues to make a series of lower lows.

Recent Earnings and Deteriorating Forecasts

NVR has fallen short of earnings estimates in three of the past four quarters, with an average -3.43% miss over that timeframe. The company most recently reported Q2 EPS results back in July of $123.65/share, missing the Zacks Consensus Estimate by -10.1%. When you’re missing consensus estimates by that amount over time, you’re going to be fighting against the current when it comes to the stock price.

The housing industry is cyclical and affected by prevailing economic conditions and interest rates. The Federal Reserve just raised interest rates by 0.75% yesterday for the third consecutive time, with two more hikes projected this year. Rates will likely continue to move higher into 2023, further dampening the affordability for prospective buyers.

Analysts covering NVR have decreased earnings estimates across the board. Looking ahead to 2023 EPS projections, the current Zacks Consensus Estimate sits at $342.03/share, down -22.86% from just 60 days ago. This would represent a negative growth rate of -30.82% relative to estimates for this year. Sales are anticipated to fall -15.33% to $8.52 billion.

Zacks Investment Research
Image Source: Zacks Investment Research

Technical Outlook

NVR stock has been steadily falling since late last year and has now established a well-defined downtrend. Notice how the stock has plunged below both the 50-day and 200-day moving averages signaled by the blue and red lines, respectively. NVR is making a series of lower lows, with no respite from the selling in sight. Also note how both moving averages have rolled over and are sloping down – another good sign for the bears.

Image Source: StockCharts

While not the most accurate indicator, NVR has also experienced what is known as a ‘death cross’, wherein the stock’s 50-day moving average crosses below its 200-day moving average. NVR would have to make a serious move to the upside and show increasing earnings estimate revisions to warrant taking any long positions in the stock. The stock has fallen nearly 32% this year alone. 

Final Thoughts

A deteriorating fundamental and technical backdrop show that this stock is not set to build on its former highs anytime soon. The fact that NVR is included in one of the worst-performing industry groups provides yet another headwind to a long list of concerns. A history of earnings misses and falling future earnings estimates will likely serve as a ceiling to any potential rallies, nurturing the stock’s downtrend.

Our Zacks Style Scores depict a weakening outlook for this stock, as NVR is rated a ‘C’ in our Momentum category and ‘C’ for our overall VGM score. Potential investors may want to give this stock the cold shoulder, or perhaps include it as part of a short or hedge strategy. Bulls will want to steer clear of a downward-trending NVR until the situation shows major signs of improvement.

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