Accredited Home Lenders Holding Co. (LEND), a residential mortgage lender, reported in early November third-quarter earnings dropped a dramatic 55 percent. Net income dropped to a little over $18 million from just over $41 million in the same period last year.
Analysts were somewhat surprised by the news as they were expecting higher revenues and earnings from Accredited. Analysts had projected revenues of over $132 million, and the company’s reported revenue was around $114 million.
The company released a statement proclaiming, “Our recent performance has been negatively impacted by fierce pricing competition, ongoing product contraction, anticipated higher delinquencies and losses, and activities associated with the acquisition of Aames Investment Corp.” Accredited acquired the Aames Investment Corporation in a $235 million acquisition on Oct. 1st.
The Homebuilding and Residential Lending Industries:
The National Association of Homebuilder’s website stated in an early November report, “Home sales still appear to be trending downward from the unsustainable levels recorded in 2005 and sales cancellations still are a major issue.”
The fitness of mortgage lending is closely tied to interest rates and home prices. Investors are having trouble determining whether home prices will continue to weaken in markets across America.
The housing market’s poor performance and the Fed’s inflation-combating interest rate hikes have caused investors to take a more maudlin view on mortgage lending stocks. It is likely the price of mortgage industry stocks now have expectations for higher default rates, greater competition for qualified borrowers and lower housing prices built in.
Accredited Home Lenders has stated lenders may have loaned money without prudent consideration of home prices and the credit risk of mortgage holders.
Company Profile:
Accredited Home Lenders Holding Co. operates as a mortgage banking company in the United States and Canada. The company sells nonprime mortgage loans secured by residential real estate. It sells loans to consumers through independent mortgage brokers and direct sales. Accredited Home Lenders Holding’s has over 40 branch locations throughout the United States. The company was founded in 1990 and is headquartered in San Diego, California.
Potential Trade:
Because the company’s recent earnings report and the industry outlook point to a bearish trend for Accredited Home Lenders. A potentially good strategy to take in a situation where an investor speculates the stock price of a company is likely to stagnate or fall is to enter a bear put debit spreads position. Using PowerOptions stock options search tools, we discovered a bear put debit spreads position for Accredited Home Lenders for January:
| Bear-Put Debit Spreads Accredited Home Lenders Inc. (LEND) $ 29.17 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SELL | Expiration/Strike | Opt. Bid |
BUY | Expiration/Strike | Opt. Ask |
%Return | Break Even |
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| QFWMF | 07 JAN 30.00 | $2.15 | QFWMG | 07 JAN $35.00 | $6.10 | 26.60% | $31.05 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The underlying stock would have to rise above $31.05 (or about 6%) before the investor would begin to lose money. If the stock price is stagnant or declines, the potential profit is 26.6%. A word of caution: with bear put debit spreads positions (as with all credit and debit spreads) an investor should consider a stop-loss management technique for exiting a position in the event the position appears to be headed for a loss.
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PowerOptions provides Internet based tools for analyzing stock options with specific search criteria and for finding potentially lucrative option income. For those seeking to execute a bear-put debit spread investment strategy for their personal portfolios, PowerOptions provides an Internet based search engine for finding potentially lucrative income producing stock options positions.
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[tags]Aames Investment, United States, San Diego, California, LEND, Accredited Home Lenders Inc., bear put debit spreads, investment strategy, iron condor, option income, poweroptions, selling naked puts, stock option trading, stock options[/tags]