In yesterday’s piece, we started examining the stocks and options of players in the U.S housing market. We started a series focused on home improvement retailers in which we examined how to write covered calls and buy puts to profit on The Home Depot, Inc.
We continue that series today with an examination of Lowe’s Companies, Inc. (NYSE:LOW). Lowe’s with a market capitalization of $47.86B is the world’s second largest home improvement retailer. The company serves homeowners, renters and commercial business customers. Individual homeowners and renters complete an array of projects and vary along the spectrum of do-it-yourself (DIY) and do-it-for-me (DIFM). Commercial business customers include those who work in construction, repair/remodel, commercial and residential property management, or business maintenance professions.
Home improvement retailers have the potential to attract traders and investors because the U.S housing market is showing signs of improvement. However, I refuse to be lured by the appearance of an improvement in the U.S housing market and I am more comfortable with a bearish position on the housing market under the current climes.
For one, I think that the U.S housing market is giving mixed signals because only marginal increment is being recorded in the consumer spending pattern. More so, the general market direction points to a maturing bull market after the bullish run has continued unhindered since the end of the recession. The fact that the S&P 500 is experiencing serious resistance at 1950 and the looming threat of a pullback to 1900 or even 1850 does not provide me with much reason for optimism.
Not All Gloom and Doom
I am bearish on Lowe’s only as we surf down the wave of the current bullish cycle. For one, Lowe’s is a fundamentally sound company with great prospects when the next bullish cycle begins. For instance, the Q1 2014 earnings was reported at $0.62 per share compared to $0.49 per share last year. More so, the earnings beat the Zacks consensus estimate of $0.61. Revenue was reported at $13.40B short 3.2% short of the Zacks Consensus Estimate of $13.87B
Reasons to Sell
Lowe’s by nature operates in a cyclical segment that is dependent on the housing market for revenue and growth.
The chart above plots the revenue and share price of Lowe’s during the recession and the following years. You will see the steep plummeting of Lowes’s revenue and share price during the recession. The share price fell as low as $15 per share while the revenue was down to around $47B.
Interestingly, you will observe that the company has shown significant improvement in its share price and revenue since coming out of the recession. In fact, the share price has risen 220% while the revenue has spiked by 15%. However, the chart shows that the company is at the peak a bullish cycle and it does not make much sense to remain bullish at the current levels. I strongly believe that Lowe’s will fall from the current peak after it releases current quarter result and as we progress into the third quarter.
How to Trade LOW Options
Writing covered calls or buying put options are the smartest ways to make a play on the options of Lowe’s. You can write covered calls with the $55 strike price against January 2015 expiration. I foresee shares of Lowe’s falling to the early-forties in the next six months and I recommend buying the LOW Jan 2015 45.000 put (LOW150117P00045000)
— Daily Option Alerts