KB Home is a home builder with high exposure to entry-level built-to-order homes, a good niche in the current market environment. In this regard, there are three primary circumstances that provide the most conducive environment for homebuilders' success: demographics, low interest rates, and current Monthly Supply of Houses in the U.S.(Source: Federal Reserve Bank of St. Louis). All three of these factors are currently positive for homebuilders. In terms of demographics, ages 26-32 are the prime ages for first-time buyers and years 2020 to 2024 will see the largest number of young adults in this age category in U.S. history. In terms of interest rates, although rates will be increasing further this year, 10-year Treasury rates are currently below 3.0% and therefore provide attractive historically attractive and affordable financing for new buyers, and mortgage credit remains readily available. In addition, the most recent monthly reading of current supply of houses is 6.3 months. Supply conditions remain attractive to builders until this inventory factor exceeds 7.0 months. Also in this regard, the NAHB Housing Market Index surveys homebuilders monthly on their current (and their estimates about the next 6 months) sentiment (from 0 to 100). This month's index is 77 which is an optimistic reading of homebuilders' sentiment. This reading compares favorably to its all-time high (since 1985) of 90 (Note: the lowest rating of 8 was in January 2009). So, this year we are definitely now in a strong "sellers' market".
Despite a slow recovery from the pandemic, the most recent fiscal year's (2021) earnings of $6.01 per share substantially exceeded 2020. More importantly, FY2022 revenues are estimated to increase another 29% above FY2021; and earnings by even more (69%), to approximately $10.21 per share (a forward P/E ratio of only 3.2 based on today's stock purchase price). It is easy to see why Goldman Sachs recently highlighted KB Home as one of its most highly recommended "undervalued value companies".
The 45.9 Implied Volatility for these KB Home Call options was attractive to the Covered Calls Advisor since it is substantially higher than the current S&P 500 Volatility Index (VIX) of 24.3. Finally, according to Reuters Research, the average price target of 15 analysts covering the company is $52.08 (+57.5% above its current price).
As detailed below, two potential return-on-investment results are:
- +2.8% absolute return (equivalent to +84.0% annualized return for the next 12 days) if the stock is assigned early (business day prior to the May 4th ex-dividend date); OR
- +3.3% absolute return (equivalent to +41.0% annualized return over the next 29 days) if the stock is assigned on the May 20th options expiration date.
KB Home (KBH) -- New Covered Calls PositionThe Buy/Write transaction today was as follows:
04/22/2022 Bought 500 KB Home shares @ $33.06
04/22/2022 Sold 5 KB Home 05/20/2022 $31.00 Call options @ $2.90
Note: the Open Interest in these Calls was 293 contracts and the Bid/Ask spread on these Call options was a desirably narrow $.15 (i.e. $2.85/$3.00) when this transaction was executed.
05/04/2022 Upcoming quarterly ex-dividend of $.15 per share
Two possible overall performance results (including commissions) for this KB Home Covered Calls position are as follows:
Covered Calls Cost Basis: $15,083.35
= ($33.06 - $2.90) * 500 shares + $3.35 commission
Net Profit Components:
(a) Options Income: +$1,446.65
= ($2.90 * 500 shares) - $3.35 commission
(b) Dividend Income (If option exercised early on May 3rd, the business day prior to the May 4th ex-div date): +$0.00; or
(b) Dividend Income (If KB Home stock assigned at May 20th, 2022 expiration): +$75.00
= ($.15 dividend per share x 500 shares)
(c) Capital Appreciation (If KB Home Call options assigned early on May 3rd): -$1,030.00
+($31.00 - $33.06) * 500 shares; or
(c) Capital Appreciation (If shares assigned at $31.00 strike price at options expiration): -$1,030.00
+($31.00 - $33.6) * 500 shares
+($31.00 - $33.06) * 500 shares; or
(c) Capital Appreciation (If shares assigned at $31.00 strike price at options expiration): -$1,030.00
+($31.00 - $33.6) * 500 shares
1. Total Net Profit [If option exercised on May 3rd (business day prior to May 4th ex-dividend date)]: +$416.65
= (+$1,446.65 options income +$0.00 dividend income -$1,030.00 capital appreciation); or
2. Total Net Profit (If KB Home shares assigned at $31.00 strike price at May 20th, 2022 expiration): +$491.65
= (+$1,446.65 options income +$75.00 dividend income -$1,030.00 capital appreciation)
1. Absolute Return-on-Investment (If option exercised early on May 3rd): +2.8%
= +$416.65/$15,083.35
Annualized Return-on-Investment (If option exercised early): +84.0%
= (+$416.65/$15,083.35)*(365/12 days); or
2. Absolute Return (If KB Home shares assigned at $31.00 at May 20th, 2022 options expiration): +3.3%
= +$491.65/$15,083.35
Annualized Return (If KB Home shares assigned at $31.00 at May 20th, 2022 expiration): +41.0%
= (+$491.65/$15,083.35) * (365/29 days)
Early assignment is somewhat unlikely, but assignment on the expiration date would also provide a very good annualized return-on-investment result for this KB Home investment. These returns will be achieved as long as the stock is above the $31.00 strike price at assignment. If the stock declines below the strike price, the breakeven price of $30.01 ($33.06 -$2.90 -$.15) provides 9.2% downside protection below today's stock purchase price.
At least eight of the nine metrics used in the Covered Calls Advisor's Dividend Capture Strategy spreadsheet must be 'YES' prior to establishing a position. As shown below with this KB Home position, all nine criteria were achieved.
