The Trades:

Buy to open the December 21, 2018 put on Armstrong World (NYSE: AWI) with a strike price of $60 at $1.65 or lower. Symbol (AWI181221P60)

Buy to open the January 18, 2019  put on Griffon Corp (NYSE: GFF) with a strike price of $15 at $1.50 or lower. Symbol (GFF190118P15)

*Be patient in your fills. The market is flipping around quite a bit and door maker Jeld (NSDQ: JELD) pre-announced a bad number last night which may put pressure on the group.

Rationale:

Higher interest rates, elevated input costs, and a labor shortage are crimping home builders. Many of the stocks in this group are way down so I spent significant time attempting to find those with worsening fundamentals that are most at risk.

Permits for new home builds fell last month. Annual estimates for the number of new homes built peaked in January and has been flopping around ever since.

Builders have been increasing prices to cover higher building costs. These are due to tariffs on imported materials and elevated wages to lure hard to find laborers. The recent steep jump in mortgage rates is inflating monthly mortgage costs to an untenable level for many buyers.

Earlier this month homebuilder Lennar (NYSE: LEN) cautioned that the housing market is experiencing a “healthy pause”. This is bad news for housing suppliers, many of whom have built up heaps of debt acquiring kindred suppliers.

Armstrong World (NYSE: AWI) is the ceiling and wall portion of Armstrong. Revenue growth is minimal despite some small acquisitions that should have boosted the top line. Although the divestiture of some less profitable businesses might help in the longer term, it increased the company’s current exposure to the domestic housing market.

Armstrong World reports its third quarter on October 29.

Griffon Corp. (NYSE: GFF) is a poor operator even in the best of times. It manufactures closets, garage doors and components for cabinetry.  It has industry low operating margins of 4%, too thin to weather a drop in housing demand. A recent slew of acquisitions leaves it highly levered (as measured by the financial standard of Debt/EBITDA, GFF is levered 6x, one of the highest levels I’ve seen).

Griffon should report its fourth quarter mid-November. A date has not been set yet but I will let you know as soon as it is announced.