Can Lennar Reach Housing Bubble Prices?

With shares of Lennar (NYSE:LEN) trading around $42, is the company an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Lennar is a homebuilder and a provider of financial services as well as an investor and manager of funds that invest in real estate assets. The company’s homebuilding operations include the construction and sale of single-family attached and detached homes, as well as the purchase, development, and sale of residential land directly and through unconsolidated entities in which it has investments. Lennar operates in several segments: Homebuilding East, Homebuilding Central, Homebuilding West, Homebuilding Southeast Florida, Homebuilding Houston, Financial Services, and Rialto. The homebuilder industry has seen rising demand over the last couple of years that has driven profits much higher for these companies. Look for a homebuilder recovery to continue and companies such as Lennar to increase profits.

T = Technicals on the Stock Chart are Strong

Lennar’s stock saw a disastrous drop in its price during the 2008 financial crisis that took it to single-digit stock prices. The stock has since recovered and is now trading near prices not seen since the mid-2000′s. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Lennar is trading slightly above its rising to flat key averages, which signals neutral to bullish price action in the near-term.

LEN

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Lennar options may help determine if investors are bullish, neutral, or bearish.

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Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Lennar Options

34.64%

76%

75%

What does this mean? This means that investors or traders are buying a very significant amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

June Options

Steep

Average

July Options

Steep

Average

As of today, there is an average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral to bearish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Lennar’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Lennar look like and more importantly, how did the markets like these numbers?

2013 Q1

2012 Q4

2012 Q3

2012 Q2

Earnings Growth (Y-O-Y)

225%

259.3%

263.6%

2843%

Revenue Growth (Y-O-Y)

36.57%

41.70%

34.09%

21.67%

Earnings Reaction

4.78%

-0.82%

-1.46%

4.78%

Lennar has seen increasing earnings and revenue figures over the last four quarters. From these figures, the markets have been upbeat with Lennar’s recent earnings announcements.

P = Poor Relative Performance Versus Peers and Sector

How has Lennar stock done relative to its peers, DR Horton (NYSE:DHI), KB Home (NYSE:KBH), PulteGroup (NYSE:PHM), and sector?

Lennar

DR Horton

KB Home

PulteGroup

Sector

Year-to-Date Return

9.78%

31.09%

47.78%

25.66%

20.45%

Lennar has been a relative poor performer, year-to-date.

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Conclusion

Lennar is a homebuilder and a provider of financial services involving real estate to consumers and companies during a time of recovery. The stock suffered, but has recently erased most of the losses and is trading at prices not seen since the mid-2000′s. Over the last four quarters, earnings and revenues have increased, which have kept investors upbeat. However, Lennar has been a poor performer relative to its peers and sector. WAIT AND SEE what Lennar does this coming quarter.

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