A Rough Year Ahead for This Sector, But Growth Remains Likely

The start of 2022 has seen interest rates start to quickly rise in anticipation of the Federal Reserve tightening monetary policy this year to help curb inflation. Rising interest rates are good for some companies, but can create tough situations for other companies.

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  • One such area is housing. Low interest rates tie into mortgage rates, and essentially how much of a home that one can afford. Other areas of the housing market are also impacted as well.

    Homebuilders are in the spotlight for some volatility in the short-term as the interest rate story plays out, but will likely head higher as the long-term imbalance between housing supply and demand continues to play out.

    Among the homebuilders, KB Home (KBH) stands out as a potential winner. Shares of the company were recently upgraded, following its underperformance relative to peers last year.

    Action to take: Shares trade at just over 5 times forward earnings, and revenue jumped 47 percent last year on the back of a strong housing market. Those trends are likely to continue, which makes the stock a combination growth and value play this year. Investors can also lock in about a 1.5 percent dividend at current levels.

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  • For traders, shares have been rangebound for months. It’s likely that the stock could jump higher in the next few months as the rising interest rate story fully plays out and stocks rebound. The April $45 calls, last going for about $1.75, look like a solid way to play a jump higher in shares. Traders should look for mid-to-high double-digit returns.

     

    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 of the companies mentioned in this article.