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Lowe’s: A Bet on Housing or a Bet on the Fed?

The Exchange

The idea of the housing recovery being real -- finally this time -- isn't brand new. Neither is the argument that it's all a Federal Reserve-driven sham that's doomed to collapse.

Either way you think, being on the long side of housing has been right for a while, and that's not up for debate. Now, it's easy to point out what's already happened and say "if only you'd bought it then." The question is whether any money is left to be made from here. One trader with significant capital appears to believe there is, at least for a few more weeks, if a big, bullish bet on home-improvement goods seller Lowe's (LOW) is any indication.

OptionMonster, the options market watcher started by Jon and Pete Najarian, noted that a sizable purchase went through Monday for the November 32 calls in Lowe's. The site says the trader sold around 10,000 October 29 calls for an average of $2.54 and bought a like number of November 32 calls for about 72 cents each. In this case, OptionMonster says the trader was closing the Octobers, which had a significant gain, and is counting on further profits by rolling forward the position to the November expiration.

These are short-term option trades that will expire if they're not exercised, not long-term assumptions that the housing market is going to roar for the next decade, so it's best not to mistake the two. But it does serve as a reminder of how strong many names in the home sector have been since the depths of the financial meltdown, and the extent to which Wall Street traders and anyone else with the stomach for it has taken advantage of the Fed's bid to reflate housing in the past year-plus.

It's paid off in the stocks. Because the U.S. central bank has kept rates incredibly low since the recession, and now it's embarking on a gigantic and open-ended purchase of mortgage-backed securities, there's no doubt it's a factor here. That might end up being something we all regret down the road, but for now, it may also keep the stocks in the housing sector heading higher. You just have to decide if that's a risk you want to take and for how long. Easy, right?

If Lowe's stock does reach the $32 strike price discussed above, it will be just 9% from its best-ever level of $34.93 (after splits) reached in February 2007, at pretty much the height for housing. Is housing overall that close to being back to where it was? Probably not, and that's not necessarily a bad thing, since people were trading homes like they were baseball cards. According to a Fannie Mae survey cited in The Wall Street Journal, 37% of people who answered their poll believe home prices will advance in the next year. We can debate whether that's a lot or not, but it is twice where it was last year, so some optimism, for better or worse, does seem to be spreading.

Like a lot of stocks in the housing arena and elsewhere, Lowe's got crushed after the 2008 crisis. Also like many stocks, it bottomed in March 2009, when it dropped below $14. In the last year alone, it's up nearly 50%, according to Yahoo! Finance Data. Lowe's top competitor Home Depot (HD) is in a similar place, currently sitting about 11% below its all-time high of $68.75 from December 1999. However, it's had an even better year than Lowe's, rising 76% from its share price in October 2011.

Lowe's 1-Year Chart

Going back five years, when the stock market was at its highest point ever, it's not even that close between the two -- Home Depot's price appreciation has well outpaced Lowe's. The edge goes to Lowe's over the past month, as seen below:

Lowe's 1-Month Chart

The homebuilder stocks themselves still aren't as close to their peaks of the mid-2000s as Lowe's and Home Depot are, but they've been surging for most part lately, especially PulteGroup (PHM), the best stock in the S&P 500 in the last year, with a gain of 301% (Lennar (LEN) is No. 3 on the index).

Lowe's and Home Depot don't necessarily have to rely on a ton of new houses going up every month. While the items they sell do go into new builds, they've also got many products for people who already have a house and are looking to refurbish a room or replace run-down fan parts.

Of course, if you're a short-term trader who's just figuring the Fed will keep elevating all things housing, you're probably not even thinking that hard about it.

So are housing-related stocks only good for a quick trade? Or is Lowe's, or Home Depot, a smart way to play a sustained recovery in the housing market? Let us know where you stand on the health of housing and its stocks.