Behind the 2020 Lumber Stock Surge

An increase in homebuilding has sent lumber prices soaring

Aug 25, 2020 at 2:53 PM
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Earlier this month, the Wall Street Journal (WSJ) wrote an interesting article diving into the recent surge in lumber stocks. According to the magazine, lumber futures ended Thursday, Aug. 6 at fresh record highs, due to the increase in homebuilding during the ongoing pandemic. Driving the home sales is undoubtedly the record-low mortgage rates, while another contributor for the increased need for building supplies stems from restaurants adjusting to outdoor seating requirements. Today we are going to dive into popular improvement stock Lumber Liquidators (LL), with a goal of gaining more detail on the individual effects this inflation in demand means for construction stocks.

Earlier this month, the homebuilding giant brushed off a brief pullback after posting lackluster second-quarter revenue. Soon after, on Tuesday, Aug. 18, Lumber Liquidators stock received a price-target hike to $23 from $11 at Piper Sandler, which comes in just shy of the equity’s current trading levels. While the catalyst behind this surprise bull note is unclear, LL now sports an impressive year-to-date gain of 174% and a quarterly climb of 93%. Perhaps most noteworthy, LL slid right into its fresh two-year high of $27.50 on Thursday.



Digging deeper, in the options pits, calls have tackled puts in the last week. This is per LL's 10-day call/put volume ratio of 22.01 at the International Securities Exchange (ISE), Cboe Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). This ratio sits higher than all but 2% of all readings from the past year, meaning options traders are substantially more call-heavy than usual.

Echoing this, the stock's Schaeffer's put/call open interest ratio (SOIR) of 0.26 sits in the 6th percentile of its annual range, suggesting a heavy call bias. In other words, there's a lot of options-related optimism circling in the options pits.

In terms of pricing, now looks to be an affordable time to jump into Lumber Liquidator stock with options. This is per the equity's Schaeffer's Volatility Index (SVI) of 71%, which stands higher than just 6% of all other readings from the past 12 months, implying near-term option traders are pricing in extremely low volatility expectations.

Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, August 23.


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