At the end of 2015, I wrote about the critical tests facing LGI Homes (LGIH). After another strong monthly closing report, LGIH seems more likely to pass the test of financial performance in coming earnings reports, but the technical test remains in place.
LGIH reported record results for a single month in December, 2015: 433 closed homes. These strong results closed out a record-setting quarter of 946 homes which in turn closed a record-setting year of 3,404 home closings. LGIH achieved 44% year-over-year growth in home closings. LGIH remains bullish for 2016 although the growth rate will likely be lot lower. LGIH’s presented a base case for 17.5% year-over-year growth to at least 4000 home closings “assuming that general economic conditions, including interest rates, and mortgage availability in 2016 are similar to those in 2015.” More importantly, these bullish expectations suggest that LGIH’s efforts to diversify away from Texas, and Houston in particular, will continue to bear fruit. Moreover, even the Texas business may continue to show resilience to the on-going collapse in the oil-patch. LGIH now seems a lot more likely to pass the financial test of growth ahead.
Investors will have to wait until March 9th to get more details on the fourth quarter and 2016 guidance, but they did not wait to buy LGIH on the news.
Source: FreeStockCharts.com
LGIH gained 7.4% on the day although it was up as much as a whopping 15.4%. This one-day pop was just enough to take the edge off the recent month-long sell-off. Trading volume was very strong although still not matching the volume on the heavy selling days. Also note above that LGIH’s intraday high of $25 on the day perfectly matched the intraday high from the attempted rally off previous lows. The stock closed right back on its 200-day moving average (DMA), a trendline that has become a pivot since mid-December. LGIH’s technical test remains unresolved as long as the stock continues to pivot around its 200-day moving average (DMA).
The sharp fade from highs was bad news for the momentum types who may have chased the stock higher on the day. However, the performance was impressive on a day where the S&P 500 (SPY) closed with a 1.1% loss and a 3-month low. The ETF for home builders, iShares US Home Construction (ITB), fared even worse with a 2.2% loss on the day. ITB last closed this low in December, 2014. The selling has a lot to do with a poor earnings report from KB Home (KBH).
Source: FreeStockCharts.com
ITB has turned from a relative out-performer to a relative under-performer. Given the ITB is just as over-stretched to the downside as the S&P 500, I expect an imminent relief rally in the index to push ITB higher. LGIH should benefit as well. However, I do not expect LGIH to break through looming overhead resistance at its 50DMA until at least the next earnings report can confirm bullish guidance for 2016.
Be careful out there!
Full disclosure: long ITB call options