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It's time to get serious about home builders again, and today I started building a position in KB Home (KBH) using options. Since the collapse of the residential real estate market three years ago prognosticators have been debating when the home builders might be worthy of investing your precious coin of the realm.As is to be expected in these volatile times most were either too optimistic or pessimistic and few got it right. Like many stocks the home builders appear to have bottomed last March. In the case of KB Home shares were available at $10. Today they have been trading between $17.64 and $18.00 per share, up 80%, although it has been a rocky road.
That is a very healthy return, but there is much more upside to come. How would you like to make 43% quick? Yeah me too!
Here's today's deal: I sold to open KBH $17.50 April 'puts' receiving 63 cents a share. That is a one month return of 3.6% or an IRR (Internal Rate of Return) of 43.2% provided the option expires next month. If it does not then the KBH stock will be mine at a share price of $16.87 or approximately a 5.4% discount to what it would cost me today.
The following chart outlines the most recent five year history of KB Homes. You can see that the stock was trading between $70 to $80 dollars a share from 2005 to 2006 and was sliding down all the way to last March.
I would not even pretend for a moment that KBH could return to these heights any time soon, but I do believe the worst is over, and that as the housing market slowly returns the stock will continue to rise. Given the dismal state of the housing industry, the rising tide for home builders has finally reached a level where there is a good chance it will beat the overall market.
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture and planning firm. He writes the columns Chasing Value and Serious Money. Disclosure: I do not currently hold shares of KBH but I do have an open option position.
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Reader Comments (Page 1 of 1)
3-17-2010 @ 10:05PM
william lindblad said...
T'will be a bad move. As Sir Harold Evans said - "opinion is worthless without fact", the cost of building vs the cost of existing has a great disparity. There remains far too many existing homes, there is an energy bill to contend with and anything in this area is going to be LONG hold. Good for the young. If you are past sixty most likely you will be dead before it fruits.
3-18-2010 @ 5:05AM
Sheldon L said...
Will L...
Fact: Even the average 60 year old should live until next month. Perhaps a little longer.
Fact: There may be plenty of cheap housing in Detroit and Las Vegas but the supply is not equally abundant everywhere.
Fact: The home builders opportunites will improve from where they are today and they will also be the benfactors of cheaper land and raw materials as well as greater liquidity going forward.