Rising Interest Rates Won’t End the Boom In this Sector (For Now)

For the first time since 2018, the Federal Reserve has raised interest rates. With yields at just 0.25 percent, however, it’s unlikely to do much more than start to cool the high inflation rates we’ve been seeing over the course of months.

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  • Some traders see a number of sectors traditionally slow down when interest rates rise, and have started to place their bets accordingly. However, while history often rhymes, it doesn’t usually directly repeat itself.

    One case right now is the housing market. Yes, higher interest rates can mean a higher cost of borrowing capital and therefore higher mortgage rates.

    But nationwide, housing was underbuilt during the past decade following overbuilding in the early 2000s. That’s why homebuilders look like an attractive play, given this longer-term trend.

    One such play is Lennar Corporation (LEN). Shares are down about 15 percent over the past year as the market has started to price in the prospect of higher interest rates.

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  • Shares trade at less than 6 times earnings, plus, revenue is up 24 percent thanks to strong housing demand.

    Action to take: Investors can likely nab double-digit gains in shares as the stock recovers from the start of a rising interest rate cycle and makes another run at a 52-week high around $118 per share.

    Plus, investors can grab a 1.7 percent starting dividend right now that has lots of room for further growth.

    For traders, the August $115 calls, last going for about $1.90, look like an inexpensive way to bet on a rally in shares in the coming months.

     

    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.

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