(This is an excerpt from an article I originally published on Seeking Alpha on August 6, 2015. Click here to read the entire piece.)
In previous pieces covering homebuilders and housing, I have noted that my favorite plays in the space remain the regional builders. Regionals tend to have lower valuations with execution and growth prospects just as good, and often better, as many of the larger builders. On August 5, 2015, LGI Homes, Inc. (LGIH) delivered in spectacular fashion. LGIH soared 23% breaking out to a new all-time high on an earnings report that was about as bullish as they come in the housing sector.
Source: FreeStockCharts.com
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The demand profile for LGIH homes is also particularly strong and bodes well for the rest of 2015:
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After concluding in late 2014 that the Texas economy was looking resilient in the face of the collapse in oil prices, I noted that LGIH and Century Communities (CCS) looked like particularly attractive buys at what I saw as valuations depressed by Texas fears. LGIH in particular had dipped earlier on financing-related activities; I recommended a “buy the dip” in the wake of that selling. So, I was particularly gratified to see that Texas was a strong component of LGIH’s record performance.
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LGIH margins are still some of the highest among the publicly traded homebuilders. {snip}
While the previous quarter was record-breaking, it was LGIH’s guidance for the third quarter and the rest of the year that really drove the stock and makes LGIH attractive even at current levels. {snip}
At the current EPS guidance, LGIH now has a price-to-earnings ratio for 2015 of 10.0. According to Yahoo!Finance, price-to-sales is still below 1 at 0.88. Price-to-book is 2.0. Short interest as of July 15th was 16.3% of float. I strongly suspect that part of LGIH’s post-earnings surge came from short-covering. However, with trading volume of 1.2M shares versus a 3-month average of 183K, the post-earnings response represents a true breakout of buying interest. The stock is of course well-extended in the short-term, but I continue to expect further appreciation through the rest of the year and hopefully into 2016 as well.
Be careful out there!
Full disclosure: long LGIH
(This is an excerpt from an article I originally published on Seeking Alpha on August 6, 2015. Click here to read the entire piece.)