A Sector You Can Call: Homes

by John Kmiecik | August 27, 2012 9:30 am

Is housing finally starting to come back?

Sales and values of new and existing homes have been slowly creeping up, but another thing that has been creeping up is the housing sector itself. Just recently, a few housing stocks hit their 52-week highs, which could be a sign that investors think it is. But some might think that the sector could be a bit extended. We’ll have to wait and see if that is true … but in the meantime, the charts still look bullish.

Here is a trade idea for you to ponder that might see the value of your portfolio tick up like the value of your house of late:

Lennar Corp. (LEN – 32.63): Long Calls

The trade: Buy the October 33 calls for 1.95 or less.

The strategy: A long call is an option strategy that can benefit from a bullish movement in the stock. A long call can profit if the stock rises and the call premium increases to an amount more than was paid. Maximum profit is essentially unlimited with a long call because the stock can continue to rise, and the maximum loss is $1.95 if LEN finishes below $33 at October expiration. Breakeven is at $34.95 at expiration based on a cost of $1.95.

The rationale: It has been a long time, but it finally looks like housing is starting to steadily improve. It’s doubtful if it will ever hit levels that were seen before this economic downturn, but it’s hard not to agree that things are looking up. LEN is generally liked by analysts, many of whom have rated it as a buy. Besides a solid stock performance over the last year, Lennar has had solid revenue growth and return on equity.

Some might argue that the stock is extended. It might be, but it still looks like it has room to move higher since its next resistance is about $40. Besides, this isn’t an investment — it is a swing trade idea that might last a couple of days or weeks.

A bullish sign for LEN would be if it can move above the previous high which was $32.81. If it can, frothy or not, it might have one more run higher in it!

As of this writing, John Kmiecik did not hold a position in any of the aforementioned securities.

Source URL: https://investorplace.com/2012/08/a-sector-you-can-call-homes-lennar/
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