Is Lennar A Buy Here?

homes

With shares of Lennar (NYSE:LEN) trading around $35, is the stock an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze it with the relevant sections of our Cheat Sheet investing framework:

T = Trends for a Stock’s Movement

Lennar is a home builder 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 in the past 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 Mixed

Lennar stock has seen an explosive move toward higher prices in recent years. The stock is now pulling back and digesting gains experienced during its latest run, so it may need some time. Analyzing the price trend and its strength can be done using key simple moving averages: 50-day (pink), 100-day (blue), and 200-day (yellow). As seen in the daily price chart below (source: Thinkorswim), Lennar is trading below its rising key averages, which signals neutral to bullish price action in the near-term.

LEN

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

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Lennar Options

43.69%

70%

68%

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

Put IV Skew

Call IV Skew

July Options

Flat

Average

August Options

Flat

Average

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

E = Earnings Are Improving Quarter-Over-Quarter

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

2013 Q2

2013 Q1

2012 Q4

2012 Q3

Earnings Growth (Y-O-Y)

-70.39%

225.00%

259.30%

263.60%

Revenue Growth (Y-O-Y)

53.31%

36.57%

41.70%

34.09%

Earnings Reaction

0.68%

4.78%

-0.82%

-1.46%

Lennar has seen improving earnings and rising revenue figures during the past four quarters. From these numbers, the markets have been pleased with Lennar’s recent earnings announcements.

P = Poor Relative Performance Versus Peers and Sector

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

Lennar

KB Home

DR Horton

PulteGroup

Sector

Year-to-Date Return

-7.63%

24.05%

4.15%

4.30%

9.29%

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

Conclusion

Lennar is a homebuilder that is experiencing consistent growth after the 2008 housing bubble burst. The stock has been on a powerful run higher but is now pulling back and digesting gains from its recent move. In the past four quarters, investors have been pleased; earnings have been improving and revenue figures have been rising. Relative to its peers and sector, Lennar has been a poor year-to-date performer. WAIT AND SEE what Lennar does this coming quarter.

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