LGIH down 5% early trading today

http://www.conferencecalltranscripts.org/8/summary/?id=30697…

seems the extra shares are already getting priced in

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I’m not understanding this. If they issue more shares they get cash to add to their balance sheet - so no value is lost? Does the market just not like this this method of raising capital? Or is the drop just another case of correlation without causation? Thanks.

I’m not understanding this. If they issue more shares they get cash to add to their balance sheet - so no value is lost? Does the market just not like this this method of raising capital? Or is the drop just another case of correlation without causation? Thanks.

Hi chris,
As I would understand it, they will dilute the number of shares by about 3.2% ($25 million secondary divided by $777 million market cap at yesterday’s close, equals 3.2%)

But they won’t be just giving the shares away as they would in giving stock grants. They are selling the shares and will have $25 million in additional capital to grow faster, buy more lots, build more houses faster, etc. If you are growing as fast as LGIH is, that’s necessary, I’d imagine. In response to that the stock is down over 5.3% today. You are right, it doesn’t make any sense, but it is probably influenced by the fact that the entire market is down today. There is also the possibility that some of the big banks selling the stock for them shorted the stock, figuring (a)they could buy it back cheaper on the secondary, and (b)they’ll get it cheaper for their own clients. That’s just my thoughts, and I’m sure some other people will have thoughts as well. I had been trimming a little because of the size of my position, but I bought a little back today.

Saul

To put it another way, they are selling $25.0 million worth of stock, and receiving $25 million in cash for it, and the market cap is currently down $46.9 million. Make sense to you?

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Does the market just not like this this method of raising capital?

I guess it just depends on if you believe they’ll use the money well and become more valuable as a company. Will the market cap go up enough because of the offering to offset the dilution? Guess we’ll see. Seems like with debt they wouldn’t have the same backlash…but what do I know?

Bear

Or is the stock just using a down market day to rest and retrace some of its rapid gains. Either way I am with Saul on this one - a good time to add.

XHB Homebuilder index is down 4.5%, interest rate yack is being attributed.

JT

Let us be bold when others are fearful.

I totally agree with Saul. Adding to LGIH today will be rewarded in the near future, IMHO.

Buy into the storm and sell when seas are calm.

Jim

“I totally agree with Saul. Adding to LGIH today will be rewarded in the near future, IMHO”.

I agree…I trimmed some a few days ago, but added some back today.

Kudos to you all who sold and are re-buying. That is kind of foresight I lack. It has had a hell of a run up which garnered attention, so in addition to people just cashing some out on a good run, short term players were attracted and are now done their short term play it seems.

At the end, a drop like this (as high as 10% down at one point) is ridiculous, and just shows markets can be irrational and tend to overreact in the short term.

It isn’t the first time I have seen stocks punished for choosing to garner more capital, that is why I pointed it out.

“Pricing it in” wasn’t really the right way to put it, as others pointed out. If the company can use this extra capital to accelerate growth, this day will be nothing more than a blip down the line.

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I added LGIH and SHOP today.

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“I added LGIH and SHOP today”.

Yes…I added to SHOP today as well.

This has to do with rate of closings increase versus rate of lots increase. It is the 40% increase in closings and the 30% (or whatever) growth that can be sustained by earnings.

The can lever the $25 million to $62 million and maintain the .67 leverage. $62 million is just about 10% of the $610 million of inventory at end of last quarter. LGIH has to sell ATM stock to fund the available growth that cannot be funded by earnings. This is the second selling since the IPO. Expect more as long as management sees growth opportunities. This is a positive event…, if management has correctly assessed the opportunity.

Interest rate concerns plus issuing shares equals price drop. But IMO, LGIH should be down less than the home builders index, not more.

KC

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