Today, we head back to the housing sector for a solid covered call opportunity. Covered call orders involve buying an equity and simultaneously selling just out of the money call strikes against the new position.
No one is disputing that higher mortgage rates have had a significant impact on the housing sector in 2022. However, that has created some long-term bargains in the space.
One of these opportunities, we believe, is Green Brick Partners, Inc. (GRBK) , a homebuilding and land development firm co-founded by famed money manager David Einhorn.
There are many things to like about Green Brick. First, the 26,000 home lots the company owns or controls are located in prime regions and markets, such as Dallas-Fort Worth, the Atlanta Metro area, and Florida's Treasure Coast, with construction scheduled to commence in Austin, Texas in early 2023. These are all regions seeing large amounts of interstate migration.
Second, unlike most of its competitors, Green Brick uses a decentralized model, where, after it purchases and develops land -- or after optioning lots from third-party developers -- its team of controlled builders take over and are in charge of zoning, land use, and other building decisions. Green Brick provides operational and human resource management support to its builders as well as other ancillary services at the retail level. It also employs a pro-active metering approach where it withholds homes for sale to avoid construction costs misaligning with pre-sold backlogs.
I also like Green Brick's expansion into entry-level and first time move-up single-family homes through its subsidiary Trophy Signature Homes in Dallas-Fort Worth, which commenced selling in the first half of 2019. Trophy's more affordable homes, quicker inventory turns, more cookie cutter-like models, and smaller lot sizes have allowed it to generate significantly more net new order volumes and income relative to its other community offerings.
The company is now expanding the Trophy concept into its other markets. This positions it well for the four million Millennials entering their prime homebuying years as well as retirees moving down from the colder climes.
Green Brick had a blowout second quarter. And while growth is going to slow at almost every homebuilder in the quarters ahead until mortgage rates stabilize, the shares trade at price-to-book ratio of 1.15 and a price-to-earnings ratio of 4.1 based on fiscal year 2022 earnings estimates. More than a lot of bad news seems priced into the shares.
In addition, the company has a strong balance sheet and a significant buyback program in place.
Option Strategy
Here is how one can initiate a position in GRBK via a covered call strategy.
Using the February $22.50 call strike, fashion a Buy-Write order with a net debit in the $19.60 to $19.80 a share range (net stock price - option premium). The call strike is almost 5% below the current trading level of the shares for additional risk mitigation.
This strategy provides roughly 18% of downside protection over the approximate five-and-a-half-month option duration and more than 14% of potential upside even if the shares slide a bit from here.
