Real estate stocks are on fire right now, thanks largely to plunging mortgage rates and record lows in housing inventories for sale.
Cabot Profit Booster 112
The Stock – Floor & Decor (FND)
Real estate stocks are on fire right now, thanks largely to plunging mortgage rates and record lows in housing inventories for sale. With building permits at a 13-year high, and builder sentiment near a 20-year high, companies that specialize in home construction and improvement have been among this year’s big winners on Wall Street. Floor & Décor is one such winner; it’s a home construction-related retail operation specializing in hard flooring (wood, tile, stone, etc.)
Last week, the company released Q4 and full-year 2019 results which topped expectations, as sales for the latest quarter rose 21% to $527 million from the year-ago quarter, while earning 0.26 per share (24% above the consensus). Store expansion has been a key strategy for the company’s continued success and has risen at a 20% annual rate over the last seven years, with seven new stores opened in Q4 alone. The company expects to open 24 new warehouse stores in 2020 and believes it’s entering this year with a more favorable economic backdrop compared to early 2019.
Technical Analysis
FND exploded to a record high last Friday after releasing its excellent earnings report. The stock had spent five months building a high-level basing pattern between the 45 and 50 levels before breaking out of it in February. With little in the way of overhead resistance to obscure its path, FND’s long-term chart suggests that a significant longer-term rise may lie ahead. Buying on pullbacks looks smart to us. Stop - 50
The Covered Call Trade
Buy Floor & Decor (FND) Stock at 57.25, Sell to Open July 57.5 Calls (exp. 7/17/2020) for $5.50, or a Net Price of 51.75 or less
Static Return: $550 per covered call (10.62%)
Breakeven: 51.75
Covered Call Return (if assigned): $575 per covered call (11.11%)
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 51.75 or less. (In this case 57.25 minus 5.50 = 51.75. Or another example is you could pay 57.75 for the stock and sell the call for 6, which also equals 51.75)
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 …
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