Homebuilder stocks have had a strong winning streak lately. The housing market as a whole has been frozen over the last year. Rising mortgage rates have kept existing homeowners from looking to change houses.
That’s resulted in most home sales coming from new, rather than existing, homes. And it’s allowed homebuilder stocks to soar. Now, with interest rates potentially coming down, they could continue that winning streak in the months ahead.
That could be a boon for a higher-end homebuilder like Toll Brothers (TOL).
Already up 77 percent over the past year, Toll Brothers has struggled a bit, with revenue dropping nearly 20 percent.
However, shares are still inexpensive at 8 times earnings. And as the housing market opens up more, profitability should bounce back.
With lending conditions easing, investors are likely to place a higher multiple on the homebuilders as a way to play a resurgent housing market. That could add on substantially to the company’s recent gains.
Action to take: Investors may want to buy some shares now, and use any market pullback to buy more. At current prices, Toll Brothers pays a 0.8 percent dividend.
For traders, the June $110 calls, last going for about $5.30, could see mid-double-digit gains or better in the months before expiration.
Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any company mentioned in this article.