Another Real Estate/Housing/Construction Stock... Really?!

Between Sears and St. Joe you might've thought I had plenty of exposure to real estate/housing/construction and I'd be looking elsewhere for opportunities.  If so, you're probably right about the "plenty of exposure" but you're wrong about the "looking elsewhere," as today I bought 125 Jan 2013 $12.50 call options on Masco (MAS) for $0.45 per contract.  In plain English these LEAPS give me the right to buy 12,500 shares of MAS on or before January 19, 2013 for $12.50 a share. 

So what does Masco do?  Well they've got five segments which I'll list below (it's OK if you cringe a little, I did too):

1. Decorative/architectural products (including Behr paint)
2. Plumbing (including Delta faucets)
3. Cabinets & related products
4. Installation and other services
5. Specialty products

As you may have guessed Masco's operating performance has been horrendous over the last several years.  Revenue has fallen about 40% from the peak, and FCF has fallen from $1.1 B to $225 MM.  So why did I buy today?  Well, it's my belief that these horrible results, dire outlook, etc. are more than priced into the stock.  Further, the company's management has done a great job of cutting costs and right-sizing the business - the fact that they're still FCF positive is actually pretty good. 

My hope is the economy manages to stay out of a deflationary spiral and we see housing rebound in a year or two.  If this is case, Mr. Market's manic depressive mood around Masco should change as well, and the stock could easily climb to the mid-teens.  Looking at my investment checklist (http://mevsemt.blogspot.com/2010/08/investing-checklist.html) this stock meets most of the criteria - insider buying, 52-week low, guru buying, discount to Morningstar & my fair value, high degree of leverage on the options, and asymmetric payoff all fit here (althoug insider and guru buying is a bit light). 

To give you an idea of the upside I'll take a haircut to Morningstar's fair value of $22 and assume the stock gets to either $15 or $17.50 at expiration.  The cost of these LEAPS was $5,656 and if MAS hits $15 they'll be worth $31.3K.  If MAS hits $17.50 they'll be worth $62.5K.  Can you say asymmetric?!

Lastly, on a cautionary note I should stress that this is a very speculative bet.  In the past some of these have really paid off (SD and NRG) and others completely flopped (EXC and so far SHLD).  I have no idea how this one will turn out, but I personally feel the risk-reward is worth it.  Wish me luck!

As always I'm available for questions and appreciate comments.  Email mevsemt@gmail.com.