Profit as Homes Revive
New Home
There’s been big action in homebuilder stocks of late. On Tuesday, Feb. 8, we saw strong gains in sector giants KB Home (NYSE: KBH), Lennar Corp. (NYSE: LEN) and Toll Brothers (NYSE: TOL). All three finished the session about 4% higher. Other stocks in the sector also shined, including Beazer Homes (NYSE: BZH). That stock jumped 2.5% despite the company reporting a much bigger-than-anticipated fiscal first-quarter loss. Of course, the market is a forward-looking mechanism, with traders always anticipating the next sector boom. And after the worst year for new home sales on record, it appears as though traders are betting on a homebuilder bounce in 2011. Option trading investors have an opportunity here too.
According to a Bloomberg article, there could soon be a revival in demand for new houses after record-low sales in 2010. And with the spring selling season just around the corner, executives from some of the largest homebuilders are predicting strong comebacks. As options traders, we can use this potential bounce by investing in inexpensive, out-of-the-money calls on some of the best stocks in the sector. Here are five trading ideas to get you on the right side of the homebuilder trade.
SPDR S&P Homebuilders
House at Night
If you want to take advantage of a bullish uptrend in the entire homebuilding sector, there is no better way to do so than with the SPDR S&P Homebuilders (NSYE: XHB). This exchange-traded fund consists of a basket of stocks pegged to companies in the space, including home-related stocks other than just homebuilders. The diversity of holdings in XHB makes this the broadest bet you can make on a housing recovery. The shares currently trade around $18.36 (as of Feb. 8), and that makes the slightly out-of-the-money XHB Mar 19 Calls an attractive bullish bet on the sector.
D.R. Horton Inc.
D.R. Horton logo
Homebuilder D.R. Horton Inc. (NYSE: DHI) recently reported a wider-than-expected fiscal-first quarter loss on a slowdown in new-home orders and an increase in cancellations. That late-January news pushed the stock down, and as of Feb. 8 the shares traded at $12.38. Now, if you suspect that homebuilder stocks will rebound in the weeks ahead, then a good way to take advantage of that is with an out-of-the-money call. One such option is the DHI Mar 13 Calls. That contract has decent volume and open interest, and that makes it a liquid trade for sector bulls.
Lennar Corp.
Lennar logo
One of the nation’s largest homebuilders is Lennar Corp. (NYSE: LEN). Unlike rivals Beazer and D.R. Horton, the company actually reported excellent earnings results for its most recent quarter. Lennar has proven that it can navigate the treacherous housing market waters, and over the years it’s been one of the most profitable companies in the industry. If Lennar can sustain those profitable results going forward, there is liable to be strong bullish action in its calls. The stock closed at $20.67 on Feb. 8, and one out-of-the-money call showing good action is the LEN May 21 Calls.
PulteGroup Inc.
PulteGroup logo
Last week, PulteGroup Inc. (NYSE: PHM) reported disappointing earnings and a wider-than-anticipated loss for the quarter ended Dec. 31. But along with the earnings report, the company expressed optimism that sales trends in January could signal improvement ahead. CEO Richard Dugas Jr. said the homebuilder saw encouraging levels of traffic from prospective buyers and sales last month that could bode well for the spring home buying season. If this thesis pans out, then we could see some upside in the PHM Apr 9 Calls. Both volume and open interest in this contract have become strong with the stock currently trading around $7.78.
Toll Brothers
Toll Brothers logo
Perhaps more than any other homebuilder, Toll Brothers (NYSE: TOL) could come back very strong in 2011. That’s because the company builds higher-end luxury homes, and that segment of the home buying public will likely be the first to make a major move back into real estate. We’ll find out details on how well Toll Brothers did in its most-recent quarter later this month when the company reports earnings. That’s also when we’ll get the company’s outlook going forward. If you want to position yourself on the bullish side of the Toll Brothers trade, then check out the TOL Mar 24 Calls.
At the time of publication, Jim Woods held no positions in any of the stocks mentioned in this article.
