Extreme sector rotation has been the story of the last week as red-hot growth sectors came under some pressure, while out of favor value stocks finally found some buying. This is a fine situation for our diversified portfolio as we are selling expensive calls that help offset any short-term stock/sector weakness. This brings me to our pick of the week, which is in a red-hot sector and recently reported very strong earnings.
Cabot Profit Booster 134
Extreme sector rotation has been the story of the last week as red-hot growth sectors came under some pressure, while out of favor value stocks finally found some buying. This is a fine situation for our diversified portfolio as we are selling expensive calls that help offset any short-term stock/sector weakness.
This brings me to our pick of the week, which is in a red-hot sector and recently reported very strong earnings.
The Stock – Meritage Homes (MTH)
Meritage builds single-family detached homes across the U.S., as well as active adult communities and luxury real estate in Arizona.
Pent-up housing demand related to coronavirus lockdowns, coupled with low interest rates, have boosted the company’s prospects.
And the good news just keeps coming. Last month, new home sales rose 14% (from May), with 776,000 units sold. Existing home sales rocketed by 21%, while the average 30-year loan rate is around 3%—all of which bodes well for the intermediate-term outlook.
Meritage has also begun to focus on building entry-level communities as a way to address the housing affordability issue for first-time home buyers. That strategy is paying off, as the company reported second quarter per-share earnings of $2.38, handily beating analysts’ estimates of $1.52 (+82%). Revenues, meanwhile, were $1.04 billion, up 19%, on a 23% increase in closed volume.
Meritage boasts a compound annual revenue growth rate of 14% over the last decade, and in its latest quarter saw 3,597 total orders—an all-time record for the firm and 32% higher than the year-ago quarter. It also set an all-time record in May for single-month orders (a total of 1,320 homes), which was surpassed in June with another new record of over 1,500 orders. Going forward, Meritage expects around $4 billion in home closing revenues in 2020 and sees the housing market recovery continuing. It’s a solid story.
Technical Analysis
MTH shares traded in a tight range from last July to March of this year, between 65 and 75. The stock dropped sharply in March, however, as the pandemic gave an unexpected surprise to the home building stocks. But the stock rebounded impressively in April and has built some impressive momentum. Stop — 84
The Covered Call Trade
Buy Meritage Homes (MTH) Stock at 100, Sell to Open September 100 Strike Calls (exp. 9/18) for $6, or a Net Price of 94 or less
Static Return: $600 per covered call (6.38%)
Breakeven: 94
Covered Call Return (if assigned): $600 per covered call (6.38%)
Please note, the stock and options prices will be moving throughout the day, so these prices are simply an approximation of prices that you should be able to achieve.
However, the important component of this equation is that the stock price paid, minus the premium received via the call sale, equals the Net Price, or 94 or less. (In this case 100 minus 6 = 94. Or another example is you could pay 99.5 for the stock and sell the call for 5.50, which also equals 94)
For every 100 shares of stock you buy, you can sell 1 call. For every 200 shares of stock you buy, you can sell 2 calls. And so on …
Open Positions
