Is there room for a constructive trade in the housing sector? I have the blueprint for an options play right here, with well-known home builder D.R. Horton (DHI) .
Horton has released first quarter earnings on Thursday, revealing that revenue rose over 20% on a year-over-year basis to $8.8 billion, approximately $100 million shy of the consensus. The company had earnings of $4.67 a share, 15 cents a share above expectations. Management also lowered forward guidance for the full fiscal year by $1.5 billion at the midpoint.
My regular readers know I have been rapidly increasing my exposure to the housing sector in recent months. Previous covered call ideas around names like Rocket Companies (RKT) and LGI Homes (LGIH) have worked out well to this point. There are numerous reasons I am bullish on the housing sector after its selloff in 2022. First, there is still little in the way of inventory available, and we have been under the historical trend for housing starts since the housing bust some 15 years ago. I also believe while the country is likely headed to recession, it should be a short and shallow contraction. It also might bring the end of monetary tightening from the Federal Reserve sooner than expected, which would be good for mortgage rates. Finally, names like Blackstone (BX) and private equity firms are raising massive amounts of new funds to go toward real estate purchases such as housing, apartment complexes and warehouses. This should help provide a nice floor under home prices.
Zeroing in on Horton, let's check the company's chart.
These sorts of results have been common from the home building sector so far this quarter. Despite the lowered guidance, DHI moved nicely up on results, as did most of the housing sector on Thursday. This tells me the market has priced in quite a bit of bad news in these names. The stock is priced at approximately four-and-a-half times this year's earnings. Even if profits fall 20% to 30% next year, which seems likely, the shares are hardly expensive.
The company has done a solid job recently of reducing debt and buying back stock. It also pays a small dividend. Taken net debt into consideration: The stock has a current enterprise value of $31 billion. The company is well represented across all price points and growing its rental options, as well. Falling prices for copper, lumber and other building supplies should be a nice tailwind for margins, even as demand falls. Gross margins as it is, have improved for four-straight quarters now. Option premiums are solid, allowing a nice return from a covered call position, even if the stock trades sideways over the next couple of quarters.
Here is how one can initiate a position in DHI via a covered-call strategy.
Using the February $77.50 call strikes, fashion a covered call order with a net debit in the $67.80 to $68.00 a share range (net stock price - option premium). This strategy provides nearly 15% of downside protection as well as 13% of potential upside even if the stock does nothing over the option duration.