Profit From the Whispers About Lennar

by Joseph Hargett | January 14, 2013 8:38 am

Despite signs of growing strength in the housing sector, homebuilding specialist Lennar (NYSE:LEN[1]) has attracted a wealth of negativity heading into its fourth-quarter earnings report. Wall Street is expecting Lennar to post earnings of 43 cents per share when it reports ahead of the open tomorrow morning, up 16 cents from the same quarter last year. For the full year, the company is seen banking a profit of $2.98 per share.

The consensus is anticipating a 38% jump in revenue to $1.32 billion in the fourth quarter, with full-year revenue expected to arrive at $4.07 billion.

Overall, analysts’ earnings expectations have risen from 42 cents during the past three months, but undercurrents on the Street may indicate that the brokerage community has set its sights considerably higher. Specifically, data from reveal that Lennar’s whisper number arrives at 48 cents per share — five cents better than the consensus.

Despite sending out earnings whispers, many analysts remain on the sidelines when it comes to Lennar’s prospects. Specifically, the brokerage community has doled out 14 holds, two sells, and 10 buy ratings. Furthermore, LEN’s consensus 12-month price target of $38 represents a discount to Friday’s close at $40.95. A positive earnings report could prompt a round of upgrades and/or price-target increases.

Options activity also suggests a negative outlook among speculative investors ahead of the report. For instance, LEN’s put/call open interest ratio for January and February 2013 rests at 1.18, as puts easily outnumber calls in the front two months of options.

Taking a closer look, we find that peak January put open interest rests at the deep out-of-the-money 32.50 strike, totaling 7,398 contracts. The January 20 strike arrives at a distant second, with 4,055 put contracts, while the January 40 strike also shows notable put open interest of 3,967 contracts. On the call side, the in-the-money January 40 strike is tops with 5,434 contracts open.

Technically, LEN has been on fire, with the stock more than doubling in 2012. In fact, the  rebound began in October 2011, after LEN escaped from the $12 region to vault above its 10-week and 20-week moving averages. The shares have since ridden these trendlines steadily higher, and haven’t closed any week below these two metrics during this time frame. LEN recently broke out to a multiyear high above $40, and is now consolidating its gains ahead of tomorrow’s quarterly earnings report.


Overall, LEN’s combination of negative investor sentiment and strong technical performance make the case for a potential contrarian trade on the stock. January implieds are pricing in a potential 5.5% post-earnings move. With January options expiring at the end of the week, traders may want to consider the February series instead. In this month, the February 41/43 bull call spread lies well within the projected move, should LEN head higher on the news.

At the close of trading on Friday, the February 41/43 call spread was offered at 87 cents, or $87 per pair of contracts. That means the breakeven for this trade lies at $41.87 (a roughly 2.3% advance from Friday’s close), while a maximum profit of $2.13, or $213 per pair of contracts, is possible if LEN closes at or above $43 when January options expire.

As of this writing, Joseph Hargett didn’t own any securities mentioned here.

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