KB Home (Here we go)

I decided to write a newsletter – initially focusing on covered calls and preferred bonds. Below is my first edition. Curious to see if you find the content below value add. I am also generally interested in your feedback.

KB Home (Ticker: KBH)

It has been a good year for the homebuilders, which is somewhat counter-intuitive. One would have expected significantly higher interest rates to reduce affordability and subsequently to reduce demand. And while demand has certainly softened it has held up pretty well. This makes one wonder where all these homebuyers were two years ago when the mortgages were often under 3%. 

In any case, being a homebuilder is a great, business for a disciplined operator. The strategy is straightforward: buy land, build a house, and sell it for a profit. Builders create equity when they build a new home – which is their profit - I think of that equity as a margin of safety, in case things don’t go as planned.  Equity created by building a home is an inherent buffer against losses.

When I look at homebuilders, I think of how much cash they have invested in the business that they can use for land purchases and construction vs. market capitalization of the business. In the case of KBH, a good proxy for the cash invested in the business is their Equity (aka Book Value), which is currently $3.8Bn (about $49 per share). Whenever the stock trades below Equity or Book Value – I think of it as literally in most cases buying a dollar at a discount. Currently, the stock is trading at $61, so slight premium to Book Value.

Another metric that I focus on, to determine the future profitability of the business is the Return On Equity (ROE) – a measure of return on cash invested in the business. In the case of KBH, it was 16% in 2023 and on average 15% during the last 6 years. Based on the 2024 forecast provided by the company, the book value should increase by another $6-7 per share in 2024.

Financial Summary

My positions:

I own covered calls with maturities on Jan 17, 2025, and strike prices varying from $40-$50

Based on current prices, if the stock stays above the strike, my returns will vary from 9-12.4%

Per my analysis above, I expect book value to reach approximately $55 / share by the end of 2024, so with strikes at $40-$50, I feel there is a margin of safety built into my position. 

Trade Analysis

Musings

It's a common narrative these days – tales of individuals supplementing their income through side hustles.  A number of my neighbors and friends from various walks of life and various backgrounds moved into real estate. Pretty much every one of them started at it as a side hustle, and they are all doing from well to very well. As I mentioned above, I think the reason why none of them quit this business is that in most cases the profit cushion (equity created by building a home) provides a buffer against things not going as planned. 

So, if you are looking for a side hustle – real estate is something to consider.

Happy investing

Behind the Curtain: The Story Behind Endgame Mindset Newsletter

I spent the first 13 years of my life in Lviv, a city in what is now Western Ukraine, but was part of the USSR when my family immigrated to Brooklyn, NY. Like many immigrants before me, financial services had a strong appeal and after graduation from NYU’s Stern, I started my adult life as an Investment Banker in Lehman Brothers’ Mergers and Acquisitions group. I have spent the majority of my professional career as an investor, investing on behalf of large institutions such as Morgan Stanley, Merrill Lynch, and Bank of America, as well as a private equity fund and helping companies buy other companies.  In my free time, I spend a lot of hours researching stocks.  A lot. It is hard to save your way to retirement without making good investments.  Buying an S&P 500 or a Nasdaq index historically has been a great strategy, and I own some of these indices as well, but I always had an issue with owning things I don’t understand – how many companies in the index do I really understand?  So I prefer to do my own research. More recently, I have also started focusing on Covered Calls.  I think it is easier to buy in the money covered calls and hope that the stock doesn’t fall below the strike vs. pick which stocks will go up.  My goal with covered calls in the current rate environment is to generate a 10-12% unlevered return.  The obvious drawback of this strategy is that if the stock goes up a lot during the year, your upside is capped.  Options have an end date – you will know if you are right or wrong once the option expires. As an immigrant, I am acutely aware that I’m living the American Dream; a wife, two kids, a golden retriever, and a strong desire to aspire to wealth. My research helps me make informed investment decisions. In writing this newsletter, I share my analysis and what I own with others, hopefully helping them earn steady and attractive returns as well.

Disclaimer:

Although the information contained in the newsletter is obtained from sources I believe to be reliable, I cannot guarantee its accuracy (I also sometimes make mistakes). The opinions expressed in the newsletter are mine and may change without notice.  The information in the newsletter may become outdated and I have no obligation to update it. The information in the newsletter is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. It is provided for information purposes only and nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell, or hold a security. No recommendation or advice is being given as to whether any investment is suitable for a particular investor or a group of investors. It should not be assumed that any investments in securities, companies, sectors, or markets identified and described were or will be profitable. I strongly advise you to discuss your investment options with your financial adviser before making any investments, including whether any investment is suitable for your specific needs.