The Volatility Trader
105 W. Monument Street
Baltimore, MD 21201
Wednesday, August 23, 2006
Email – #171
Dear Volatility Trader Member,
Developments in a couple of major sectors are affecting stocks that we’re currently holding, and you need to be prepared to take action.
First of all, the latest housing data came out this morning, with the news that existing homes sales dropped to 6.33 million units, well below expectations that called for 6.58 million.
In addition, overall house prices have appreciated a mere 1% over the past year, while inventory is at the highest level since 1993. Simply put, the outlook for the housing sector doesn’t look too good. Most of the stocks within the market have endured a pummeling as the market has cooled.
But here’s the thing: Sometimes, when the climate looks bleak, that’s when bottom-feeders step in looking for bargain-basement prices on solid companies. And the fact is, many still look very attractive fundamentally at
the moment.
Take our own recommendation, KB Homes (NYSE: KBH), for example. Considering it’s still in a pretty vibrant market (the housing market hasn’t crashed completely), the stock’s P/E ratio is just 4, while it’s trading at 0.38 times sales.
Here’s the kicker: The company’s revenue exceeds its market cap almost three-fold. Bottom line: The fundamentals are solid, but the market is scared.
Despite these attractive financials, however, the stock could still easily pop at any moment on a fundamentals-driven short squeeze. Thus, we will maintain our stop on KB Homes at $40. If news develops that causes the stock to hit this level, we’ll inform you immediately.
Tech Sector Primed for a Pullback?
Elsewhere, with industry-watchers getting increasingly concerned at the continued build-up in semiconductor chip inventories, tech stocks are setting up for a pullback. The news was obvious in Applied Materials’ (Nasdaq: AMAT) earnings report last week, and with the broader CBOE Technology Index (^TXX) having stalled four sessions ago, a sector wide slowdown looks likely.
This bodes well for our put options on Research In Motion (Nasdaq: RIMM). However, given that we’re looking for a significant decline in just a short period of time, there’s a chance the downturn might not happen soon enough. If not, we will close the trade. In the meantime, however, we’ll leave the trade open and keep the stop at $81.71.
Current Portfolio
Stock / Option: Research in Motion
Current Price: Sept. $70 puts (RUP UN) $0.45
Comments: Hold. Close trade if stock moves above $81.71
Stock / Option: KB Homes
Current Price: Sept. $45 calls (KBH II) $0.45
Comments: Hold. Close trade if stock falls below $40.
