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Singles Only: Three Trading Ideas Under $10


Hovnanian, Standard Pacific, and CNO Financial could be headed higher.

Our latest scan for potential contrarian trading ideas on stocks below $10 used short interest as a key variable. (Last time, we looked at analysts' ratings.) The 35 names in the table below are in positive territory for the year, but more than 10% of their float is sold short. Three names that stood out in particular after further reviewing the charts were Hovnanian Enterprises, Inc. (HOV), Standard Pacific Corp. (SPF), and CNO Financial Group Inc. (CNO).

The theory is that technically strong stocks that are heavily short sold could see additional upside, if short sellers plot an exit strategy. This phenomenon is known as "short covering" and could theoretically help any of the names listed below. (Data courtesy of

We've been fans of the housing sector for a while, and Hovnanian is one of its lower-priced members. The shares have more than doubled in 2012 and are now fighting to overtake the $3 level. Today, the stock has added 4% in anticipation of the stock's earnings report later this week.

Short interest grew by 7% during the last reporting period and now accounts for roughly one-third of the equity's available float. At the stock's average daily trading volume, it would take short sellers more than two weeks to close these shorted positions. A post-earnings pop higher could be the needed impetus to send these short sellers toward the exits. Additionally, with four of the seven analysts following Hovnanian naming it a "strong sell," any added love from the brokerage community could offer some assistance to the bullish cause.

Standard Pacific is another cheaply priced homebuilding stock that hit our radar. The stock has glided to a new two-year high today, adding to its impressive 52-week gain of roughly 180%.

Meanwhile, more than 19% of the equity's float is sold short after a solid increase in shorted shares during the last two reporting periods. Traders of a speculative nature could consider Standard Pacific options, as they are currently priced at an annual low, relatively speaking. The stock's Schaeffer's Volatility Index (SVI) of 41% is lower than any other reading this year.

Insurance holding company CNO has rallied by more than 50% in the last 52 weeks and is up almost 42% in 2012 alone. Still, just two of six covering analysts rate the stock better than a "hold" and the consensus 12-month price target of $9.03 is a mere chip-shot away from current levels. Any positive momentum among this skeptical group could help boost the shares into double-digit territory.

On the short-interest front, more than 10% of the stock's float is sold short, resulting in a short-interest ratio of 11.1 (in other words, the number of days required to cover the existing short stock). Meanwhile, option players have taken a bearish stance, as evidenced by the 10-day put/call volume ratio at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). This ratio -- 11 percentage points south of an annual high -- stands at 1.33, meaning roughly four puts have been bought to open for every three calls during the last two weeks.

This article by Beth Gaston was originally published on Schaeffer's Investment Research.

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Twitter: @schaeffers
No positions in stocks mentioned.
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