Deconstructing a Huge Profit in the Building Sector
A few days ago, I had the pleasure of closing out a trade for a 375% gain in just two weeks. And to tell you the truth, it wasn’t that hard. Here’s how it happened.
On October 12, I issued a trade alert to readers of my Mayhem Trader options trading service. That day, I recommended buying a put option on fiberglass manufacturer Owens Corning (NYSE: OC). A put option increases in value when the price of the underlying security goes down.
The reason I believed OC was heading for a fall is straightforward. The company derives most of its revenue from building materials used in insulation and roofing for residential and commercial properties.
That’s a good business when there is a lot of new construction underway. But it’s not so great when building slows down.
Unfortunately for Owens Corning, a combination of high mortgage rates, soaring office vacancies, and escalating property values has decreased demand for new building projects. In turn, demand for the insulation, shingles, and other products using fiberglass made by Owens Corning is also slowing down.
When Owens Corning released its Q2 results three months ago, it acknowledged those issues but made no adjustments to its forward guidance for them. Instead, it trumpeted its solid operating results over the first half of the year.
That’s when my Mayhem Trader stock screener kicked in. It noticed the high multiple to sales and earnings Wall Street was assigning to OC despite those challenges.
That’s when I issued my trade alert. I said then, “I believe Owens Corning must recognize that reality when it releases its Q3 results on October 25.” In short, I felt the company would downgrade its guidance for the remainder of this year.
A Harsh Reality
That’s exactly what happened. In its Fourth Quarter Outlook accompany those results, Owens Corning acknowledged:
- The key economic factors that impact the company’s businesses are residential repair and remodeling activity, U.S. housing starts, global commercial construction activity, and global industrial production.
- Weaker macroeconomic trends outside of the U.S. and increasing interest rates continue to result in slower global economic growth, but the company expects most of its building and construction end markets to be relatively stable in the near term.
- For fourth-quarter 2023, the company expects overall performance to result in net sales slightly below the fourth quarter of 2022, while generating mid-teen EBIT margins.
That’s all Wall Street needed to hear to abandon the stock. After closing above $123 the day before that announcement, OC opened below $111 the following morning as shown in the chart below.
As a result, the put option I recommended that expires on November 17 at the $125 strike price had an intrinsic value of $14. That was more than four times what we paid for it, so I closed out that position and booked a 375% profit.
To be clear, I’m not glad that the building industry is in a jam. It provides a lot of good paying jobs and is a driver of the overall economy.
But at the same time, it is my job to recognize opportunities in the stock market and make my readers aware of them. And right now, companies that rely on the building industry for most of their revenue are facing a harsh reality.
Making Money in a Choppy Market
I suspect there will be many more trading opportunities like this one in the months to come. Although some companies have already adjusted their guidance to reflect the likely impact of a slowing economy, many have not.
Some of them have good reason to believe they will not be adversely impacted by the same factors that are impeding the building industry. High energy prices are good for oil producers, while rising interest rates could be good for lenders.
However, a slowing economy is hard on everyone. High oil prices may be negated by reduced demand for energy, while rising interest rates could suppress demand for credit.
That is why we created Mayhem Trader in the first place. The stock market doesn’t always go up. And when it goes down, most investors have no idea how to deal with it.
I don’t know when the stock market will break out of its current slump. But I do know it won’t happen overnight. As an investor, you can either ride it out and take the beating or have a system for making money in a choppy market.
PS: As you can see from the huge gain on Owens Corning described above, Jim Pearce has developed an under-the-radar strategy to flip market mayhem into fast payouts. Want to learn the details about his next market-thumping moves? Click here now.