A strategy idea for options trading investors.
There’s not a whole lot happening on the earnings front this week. Nike (NYSE: NKE) and Monsanto (NYSE: MON) are the biggest names, with Family Dollar (NYSE: FDO) and General Mills (NYSE: GIS) filling in the week. Despite its smaller stature in terms of market cap, KB Homes (NYSE: KBH) should attract a lot of attention. Nothing like a homebuilder to get tongues wagging about the health of the economy … or lack thereof.
KBH reports on Wednesday before the open, with analysts expecting a loss of 31 cents per shares, nine cents better than a year ago. KBH’s three main competitors – D.R. Horton (NYSE: DHI), Lennar (NYSE: LEN), and PulteGroup (NYSE: PHM) — all beat their respective earnings estimates this quarter. And all enjoyed a brief pop after reporting … for a day. Then reality set in and all three dropped lower in the subsequent week and gave up more ground in the second week. What’s worse, KBH has followed that pattern in its previous three earnings reports.
With all the negativity swirling around the housing sector, you’d think these stocks would be universally hated. But they’re not, for whatever reason. Short interest on KBH is moderate but well off the peaks seen last October and November. And six of 16 analysts stubbornly rate the shares a “buy,” even though the stock is down more than 25% from its January peak.
KBH’s chart shows a troubling pattern. For the past three months, the overhead 200-day moving average has provided staunch resistance just above the 12 level. Note also how most of the recent trading activity has been corralled between the 11 and 12 levels. It’s no coincidence that peak call and put open interest in the July series is at the 12 and 11 strikes, respectively.
It’s going to be difficult for KBH to muster up any good news in its earnings report. The best the company has going for it is that expectations for the industry as a whole are low. But with pockets of optimism still in evidence, lousy fundamentals, a recent history of poor post-earnings performance (including recent slides by competitors), and strong overhead resistance, we’re looking for the path of least resistance to be lower. Look for a drop to the 11 level and perhaps below over the next couple of weeks. Buy the KBH July 12 Put for 70 cents or less.
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