Beazer Homes: Option Traders Expecting Major Move Higher in Another Homebuilder

Beazer Homes (BZH) is seeing a second consecutive day of bullish call activity and the action points to shares of the homebuilder more than doubling in the next 2 months. Shares are up more than 20% today and are trading around $2.15, with implied volatility soaring from 134% to 394% in recent days, the largest move I have ever seen in the options market. Yesterday, more than 10,000 calls traded as compared to just 10 puts, and today more than 13,000 calls have traded versus 316 puts. The most interesting part is that option traders are piling into June $5 calls, which would require shares to more than double to be in the money, with more than 10,500 trading today but mostly from a large 10k+ block that was tied to a massive equity purchase, a possible buy-write strategy that leaves room for a significant upside move in shares.

Beazer does have major concerns with the amount of debt on the books, which is 5 times the amount of equity, but the company does have more than $11 in cash per share on the books and the recent bond auctions at other homebuilders such as Lennar (LEN) are beginning to show that the Homebuilders are stabilizing and investors with risk appetite are coming back into the group that was the first to turn around in the broader market picture. With nearly 30% of the float short in Beazer, there appears to be limited downside and shorts will likely come under pressure to buy shares back soon, also known as a short squeeze.

A technician would also take a look at the chart and note that shares have breached a downtrend and are approaching its 200 day exponential moving average on massive volume coming into shares.

Beazer has earnings scheduled for May 14th which should provide more clarity on the company’s economic health, but at this point, it appears that traders in the options market see significant upside in the residential construction company as recent economic data shows improving housing markets, which could spur growth in new home builds. Many of the homebuilders have more than doubled this year, and the action is pointing to Beazer being the next.

Disclosure: No Position in Beazer (BZH)

Comments

[highwaytose...:]

Housing prices need to stabilize. The GSE caused crisis we have now, will be like the equity bubble of the dot bombs. The big difference is the dot bombs were never 20% of the economy and the mal -investment and human talent wasted in this and the financial sector that pushed the debt bubble from housing and debt financing is fascism. This GSE regulation and cover up through through the media cartels non reporting on these issues. Housing was cased by non free market cronyism. Why would you place a penny of equity in these guys?

Apr 25 08:51 AM

[erniem:]

Only in America is a corp with five times as much debt as equity considered a possible deal. Any where else its a risky proposition.

Apr 25 10:03 AM

[metalhead:]

I've taken a detailed look at this companies balance sheet, and unless you are a quick trader I'd stay far away.

They aren't generating enough sales to offset debt service. They've pulled out of markets, slashed staff and costs, but their land positions are still huge. Available cash is down around $400 million, and they have a coupon payment due next month ($136 million.) Unless they can generate significant increases in sales, they will be bankrupt in early 2010.

I am projecting about 3-5K closings for FY 2009, based on past quarters numbers. Unfortunately, if they aggressively slash prices to meet quotas they will take more balance sheet impairments. This will reduce their tangible net worth below covenant thresholds, potentially triggering margin calls on 10% of their debt (another $180 million.) If that happens, they will probably file ch. 11 later this year.

Apr 25 12:18 PM

[Joe Kunkle:]

I will not argue with any of the above, but I am in the game of "making money", not worrying about balance sheets that really mean nothing when you are a trader. Markets are forward looking, and I am sure the same comments would have been made a few weeks ago when option trading was saying to buy E-Trade (ETFC) at $1.30, which has debt/equity ration of 5.6, and traded near $ just 10 days later......the options market does not lie, and the smart money is telling people to buy into Beazer, while the "dumb" money worries about balance sheets....(which are manipulated by the same people that caused many of the problems in the financial industry).

Apr 25 12:50 PM

[Joe Kunkle:]

Should say $3, more than double....

Apr 25 12:51 PM

[sr9web:]

good post

On Apr 25 12:18 PM metalhead wrote:

> I've taken a detailed look at this companies balance sheet, and unless
> you are a quick trader I'd stay far away.
>
> They aren't generating enough sales to offset debt service. They've
> pulled out of markets, slashed staff and costs, but their land positions
> are still huge. Available cash is down around $400 million, and they
> have a coupon payment due next month ($136 million.) Unless they
> can generate significant increases in sales, they will be bankrupt
> in early 2010.
>
> I am projecting about 3-5K closings for FY 2009, based on past quarters
> numbers. Unfortunately, if they aggressively slash prices to meet
> quotas they will take more balance sheet impairments. This will reduce
> their tangible net worth below covenant thresholds, potentially triggering
> margin calls on 10% of their debt (another $180 million.) If that
> happens, they will probably file ch. 11 later this year.

Apr 25 01:12 PM

[t-bird:]

Joe,
Hope you have not placed a bet on BZH because if you have I have news for you. I do not know where you reside or if you are familiar with BZH's product and quality.

I am a Realtor and reside in a southeastern area where BZH has projects in some stage of construction. Let it be known that people who have purchased a BZH home are some of the biggest critics of the company. Many think they are known for substandard quality. I will in fact not show a BZH product because of the quality problems.

Only advice I will give you in purchasing calls is to straddle and cover your arse with a corresponding put investment. Caveat Emptor!!!

Apr 25 01:46 PM

[metalhead:]

Joe, I see your point and there are safe ways to play BZH, like going long with a tight stop. However I refuse to play the game of speculating in short term price movements. The only people getting rich are Goldman Sachs and other trading houses playing these short squeezes with OPM (other peoples money.)

I just picture some poor guy dumping a good chunk of his savings into this and forgetting to set a stop loss, then waking up one fine day to see CNBC announce they've filed ch. 11.

Apr 25 02:14 PM

[Did U Think...:]

Nobody plans to hold them to expiration. They are playing the reflation trade. They are buying whatever has been beaten down whether or not it has any value. I wouldn't buy BZH stock or options with the money of my worst enemy.

Apr 26 01:59 AM

[Joe Kunkle:]

Shares up 33% day after my write up...calls up 100%+...As I said, I am int eh business of making money...I will leave the squabbling over debt levels and the balance sheet to those that will be run over by the smart money....

Apr 27 11:18 AM

[docfisher:]

As far as the real estate broker who said that Beazer's homes are junk, just have a look at Pulte and Centex's quality ratings - they make Beazer look like a star. So much for opinions. If he refuses to "show" a Beazer home then I guess he won't be showing ANY homes - on to selling pencils....

Apr 30 09:12 AM

[docfisher:]

As far as the real estate broker who said that Beazer's homes are junk, just have a look at Pulte and Centex's quality ratings - they make Beazer look like a star. So much for opinions. If he refuses to "show" a Beazer home then I guess he won't be showing ANY homes - on to selling pencils....

Apr 30 09:12 AM

[Patti:]

Here's my point - the basics.
Anyone that bought BZH when it was below $1.00 has made money and possibly alot of money depending on the quantity of shares. I see it on the rise throughout the summer with a wind down in the fall. I do not see a bankruptcy in the near future.

May 04 01:24 PM