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LGI Homes Is Now Fairly Valued

Jul. 10, 2017 3:29 AM ETLGI Homes, Inc. (LGIH)5 Comments
L&F Capital Management profile picture
L&F Capital Management


  • LGIH was our favorite homebuilder stock in early March
  • Since then, the stock has rallied 35%, making it the best performing homebuilder stock in that time frame
  • The valuation is now nearing a cyclical peak, while macro headwinds continue to mount
  • We believe now is a good time to start reducing exposure

In early March, we singled out LGI Homes (NASDAQ:LGIH) as a value pick in the roaring homebuilder space. At that time, the stock was materially undervalued relative to its peers due to its dependence on certain oil-based housing markets. Since then, though, things have turned around for LGIH.

After disappointing home closing numbers in March, LGIH roared higher in May after topping Q1 estimates thanks to strength in rising home prices. That was followed by a record number of home closings in June and all of Q2. All in all, the stock is up some 35% since our article in early March.

Although the LGIH growth story has only strengthened since March, we believe now is a good time to start fading the rally due to a capped out valuation.

One of the features we liked about LGIH stock in March was that it was a huge under-performer on a trailing basis. But that is no longer the case. In fact, LGIH's 35% gain since early March makes it the best performing homebuilder stock in the group we follow in that time frame.

The big run-up also eliminates another feature we liked about LGIH stock: its depressed valuation relative to peers. In early March, LGIH stock was trading around 9.5x trailing earnings, while the group traded around 13x to 20x. That is a huge valuation disconnect of more than 35% from the low-end of the group.

Today, though, that is no longer the case. LGIH trades around 12.5x trailing earnings, while the group trades around 14x to 23x. That 35% valuation gap has narrowed to just 12%.

LGIH is also approaching what looks like a valuation peak. We noted in early March that it looked like

This article was written by

L&F Capital Management profile picture
L&F Capital Management, LLC, is a quantitative investment management group located in San Diego, California. Our multi-strategy investment approach comprises a mix of event-driven trades and long-term value investments, utilized together to maximize profit in both short and long term scenarios. We maintain consistency in portfolio mix through our long-term value holdings, but stress flexibility in portfolio mix from our daily event-driven trades. We believe this mix of flexibility and value generates both short and long term profits while reducing exposure to market volatility. L&F also shares various trade and investment opportunities through Seeking Alpha. For more information, visit www.lfcapitalmanagement.com.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (5)

packfvr profile picture
Purely technically speaking the stock is breaking out of a consolidation that has plenty of depth. You could argue $52 near-term.

You could also argue that the whole space is undervalued. The macro story is extremely compelling with very low supply and historically high rents. DHI and LEN are also breaking out. The reality is these companies are growing earnings 15-20+% and have PEG's that are well below 1.
Saul Rosenthal profile picture
They usually average selling 5, 6, or 7 houses per active selling community. Averaging selling 8.8 or so houses for each of their 71 active selling communities means they were going like gangbusters. It was an incredible month.
Karl Glazier profile picture
LGIH still has the lowest P/E and highest growth rate right now of any builder, except CCS, which has a lower P/E.
Saul Rosenthal profile picture
You must be kidding. I guess you didn't actually look at the June results. Let's see:
623 closings in one month! --- Up 75% from 355 a year ago!

1511 closings in one quarter! --- Up 34% from a year ago! --- Up 33% from the previous all-time record!

Up just 99% sequentially!

And assuming that the price per home continued up 10% or so, revenue will have been up 47% from a year ago, and probably earnings too.

And 623 closings, divided by 71 active developments, gives me an absorption rate of 8.8 per development, by far the highest ever! You say "Home-builder confidence is being dragged down by labor and lot shortages. In May, housing starts hit an eight-month low and building permits fell to their lowest level since April 2016." Do you think LGIH confidence has been dragged down. And seeing that they hit those enormous numbers the month after housing starts hit an eight month low, what do you think?

How about $5.00 earnings and a PE of 12 = $60 (up 43%). A PE of 12 is really conservative for earnings up 47% year over year, don't you think?

Michael Borisov, CFA profile picture
Hi Saul, what's an absoprtion rate? I see it's closings per active development, but what big meaning does it have? Thanks
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