Homebuilder KB Home (KBH) will step into the earnings limelight bright and early on Jan. 13, and while expectations remain muted for KBH earnings, the White House has created a bit of a furor for homebuilders by announcing that the FHA will reduce mortgage insurance premium rates.
Currently, Wall Street is expecting a fourth-quarter profit of 56 cents per share for KBH stock. During the past four quarters, KB Home has bested the consensus only twice. Despite this shaky fundamental performance, EarningsWhisper.com reports a fourth-quarter whisper number of 60 cents per share.
The brokerage community’s optimism ends there, however. According to data from Thomson/First Call, only five of the 23 analysts following KBH stock rate the shares a “buy” or better, compared to 16 “hold” ratings and two outright “sells.”
What’s more, the 12-month consensus price target of $18 represents a meager premium of only 7% to yesterday’s close at $16.80.
Pessimism is also thick among short sellers. Currently, 16.8 million shares of KBH stock are sold short, accounting for more than 20% of the stock’s total float, or shares available for public trading. If KB Home can continue its current rebound, potentially driven by positive guidance notes, it could prompt a short-covering rally.
Along those lines, it appears that short sellers are getting a bit nervous. KB Home has seen impressive call volume recently, driving the equity’s January put/call open interest ratio to a near-term low of 0.51, with call open interest practically doubling put open interest among front-month options.
Click to EnlargeOverall, January implieds are pricing in a potential post earnings move of about 8.2% for KBH stock. This places the upper bound at $18.39, while the lower bound lies at $15.61. An upside move would place KB Home north of resistance at the $18 level and potentially push the shares into annual high territory.
A post-earnings selloff, meanwhile, would send KBH down for a test of its December lows.
The current wealth of negativity levied against KB Home set against the stock’s current rebound makes a contrarian play rather tempting heading into earnings — especially with the potential impact of last quarter’s strong new home sales figures.
2 Trades for KB Home
Bull Call Spread: Those traders looking to take a chance on a KB Home rally might want to consider a Feb 17/18 bull call spread. At the close of trading on Thursday, this spread was offered at 40 cents, or $40 per pair of contracts. Breakeven lies at $17.40, while a maximum profit of 60 cents, or $60 per pair of contracts, is possible if KBH stock closes at or above $18 when February options expire.
It should also be noted that it is possible to double you initial outlay on this trade (at $17.80) even if KB Home fails to top the $18 mark, so be sure to set your limit orders accordingly.
Put Sell: Alternately, if you’re not comfortable with a bullish KBH trade, you could look into a put sell position. For instance, a Jan 15 put sell stands a good chance of finishing out of the money when these options expire at the end of next week.
After the close last night, the Feb 15 put was bid at 18 cents, or $18 per contract. On the upside, you keep this premium as long as KBH stock closes above $15 when January options expire. On the downside, should KB Home trade below $15 ahead of expiration, you could be assigned 100 shares for each Feb 15 put sold at a cost of $15 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
