EOT Trade Alert – October 18, 2012

Corey Williams | October 18, 2012

October 18, 2012

Trade Alert:

Buy PHM April 2013 $19 Calls at $2.25 or better

Company Background:

PulteGroup (PHM) is a US based homebuilder.

Short-Term Catalyst:

The housing market is heating up…

Earlier this week, reports on new housing starts and building permits show the revival in home building is happening faster than expected.

Housing starts jumped from 758,000 in August to 872,000 last month. It was well ahead of the 768,000 starts everyone was expecting. And more importantly for Pulte, single-family starts increased from 543,000 in August to 603,000 in September.

What’s more, the number of new homes under construction rose 2.6% to 507,000.

Since August of 2011, we’ve seen a steady increase in the number of homes under construction. But 507,000 homes is just the tip of the iceberg…

New home construction needs to be running at a rate of around 1 million homes per month, just to keep pace with population growth!

As homebuilders ramp up production to meet demand, PHM should see revenue and earnings soar. Not surprisingly, analysts have been busy ratcheting up PHM’s EPS estimates.

Right now, PHM is expected to earn 24 cents next quarter and 91 cents in 2013. But those estimates are likely too low in light of the recent data.

Let’s grab call options on PHM to profit from the resurgent home building industry!

Trade Details:

Underlying Stock Symbol:	PHM
Current Bid-Ask Price:	$2.06 – $2.11
Option “Buy Up To” Price:	$2.25
Break-Even On Stock At Expiration:	$21.25
Maximum Risk Per Contract:	$225

Exit Strategy:

PHM is trading at $17.69 per share. Resistance levels will be at $25.00 and again at $30.00. Remember, we want this stock to move higher. Support levels will be at $15.00 and $13.50. Conservative investors should look to exit at the first support or resistance level. Aggressive investors may want to hold for a bigger move.

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