Event: Lenar (LEN) reports their fiscal Q1 results tomorrow before the open, the options market is implying about a 6% one day move which is rich to the 4 qtr average move of 4%.
Price Action / Techncials: the stock is up 9% year to date, and up 13% from the 2015 lows made in mid January. The stock recently broke out to new 4 month highs, but is clearly struggling to hold the gains:[caption id="attachment_52042" align="aligncenter" width="600"] LEN 1yr chart from Bloomberg[/caption]
On a longer term basis, the breakout of the two year consolidation looks a bit more powerful having established a new range (for now) above $45:[caption id="attachment_52043" align="aligncenter" width="600"] LEN 3yr chart from Bloomberg[/caption]
The longer term 11 year chart shows the importance of this $40 to $50 range during the real estate bubble of the last decade.[caption id="attachment_52044" align="aligncenter" width="600"] LEN 11yr chart from Bloomberg[/caption]
Valuation: But here is the kicker. Back in 2005, when LEN topped out near $70, the company notched earnings of $8.30 a share. On a trailing basis that placed the stock at 8.3x earnings . Ten years on, in fiscal 2015, the company is expected to earn $3.10, an 8% year over year increase with a sales increase to $8.65 billion, up 11% year over year, which is a little more than half of its 2006 sales of $16.27 billion. I think it is safe to say that earnings and sales predicated on bullshit lending practices vs those in a zero interest rate environment with tight lending standards are not created equal, or at the very least shouldn’t be. Either way, LEN, trading at a market multiple, given the volatility in its earnings and sales, seems a tad rich.
My View: A few weeks back Toll Brothers reported Q1 that beat expectations and the stock broke out to new 52 week highs. It has since been unable to hold those gains and is down 5% from the highs. More importantly, the failed near term breakout has kept the stock contained in the two year range between $30 and $40.
A couple weeks ago we placed a bearish trade in the XHB, the homebuilder etf (here) predicated on the fact that the recent news on household formation and TOL’s results could be a sort of as good as it gets situation and possibly a last dash for homes prior to investors fears of rising interest rates. I like the idea of fading the recent enthusiasm in the space, but I am already there so will not pull the trigger on this event itself. But I still want to look at some trades:
Bearish – $48 is close support but if that fails $44 could definitely be in the cards. If one bought the April 48/44 put spread for $1 they’d have a pretty nice risk/reward set-up for that move. April vol is elevated slightly but not near highs so a sideways move or slightly lower will probably be a loser but not devastating as IV should only come in 5 points or so. Of course a move higher would suck.
Bullish/Breakout/or stock alternative – This one is a little tougher. We looked at calendars and those dont look that great but perhaps May is the way to play this so that one could give themselves time to be correct even if wrong initially. The May 50/55 call spread is 1.25 and would be in the money if the stock matched its recent highs. It’s not the greatest trade in the world but vol is decent and it’s alot better than owning stock here in our opinion.