Last week, the Seattle Mariners played a two-game set versus the Oakland Athletics in Tokyo to open the 2019 Major League Baseball season. The other 28 teams across the majors will begin playing ball in the first games that count this Thursday (tomorrow) afternoon. Opening day. A new beginning. A new leaf. They say.
It was Alfred, Lord Tennyson who long ago wrote in "Locksley Hall" that "In the Spring, a young man's fancy lightly turns to thoughts of love." Many have since added the words "and baseball." Lennar Corp. LEN is betting that it won't be just be the young, and certainly not just men, but that the environment is ripe for a springtime boost in demand for new housing.
Lennar reported fiscal first quarter results on Thursday morning that while improved, were disappointing. Earnings per share missed by two cents. Revenue missed by $230 million, even with a 29.9% year-over-year increase.
Two strikes. The good news is that nobody strikes out on two pitches. There's at least one more pitch on the way.
Despite the earnings miss that was based on Lennar having delivered considerably fewer new homes in the quarter than had been projected, despite February Housing Starts that printed in horrific decline, and despite the poor weather that plagued much of the country, one must understand that investors had baked in a lot of weaker performance.
The stock, LEN, had given up roughly 16% over the past year.
Now, the yield curve has come under intense pressure. This offers a various array of problems that will not be priced in here, at least not soon.
This is beneficial to companies such as like Lennar and KB Homes KBH, another homebuilding stock that is trading higher Wednesday morning after reporting its results on Tuesday night.
What those who invest in homebuilders see right now is an environment where mortgage rates are moderating from where they were recently, as rising home prices abate somewhat. Just this week, we witnessed the mildest print (January) for year-over-year home prices (Case-Shiller 20 city HPI) since 2012. On top of that, the most recent data from the Mortgage Bankers' Association shows a decline in 30-year fixed mortgage rates to 4.45%.
Now, add all of this information to the fact that unemployment is running very low, there are far more job openings than folks willing to fill them, and wages are showing signs of growing a little faster than they have in many years. That's why there is hope. Hope for first-time home buyers. Hope for household formation. That's why there is a bit of pop in these shares Wednesday morning.
The most important item you see here is the imminent "Golden Cross"(The 50-day simple moving average crosses over the 200-day SMA). That's a catalyst that often creates a bullish response that has become only more reliable recently in the algorithmic era than it had been when human traders controlled the point of sale.
In addition, traders are seeing a bullish-looking daily Moving Average Convergence Divergence (MACD) and a Fib retracement level at $50.50 that appears to have broken, which could provide support and probably allows for movement as high as $54.60 in the short to medium term.
The dividend yield is not a significant consideration here, so interested traders can get involved in a risk-averse way that does not require an immediate equity stake.
My Trade Idea (minimal lots)
-- Sell (write) one LEN April $50 put (value: $1.30)
-- Purchase one LEN April $52.50 call (value: 0.90)
Net credit: $0.40
Note: If the investor ends up eating 100 shares in April, the position will run with a net basis of $49.60. If the shares run higher than $52.50, by then the investor will own 100 shares at a net basis of $52.10.
If the shares stay in between the $50 and $52.50 levels through April expiration, then the investor keeps the $40. That's more than a tank of gas for most folks.
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