I hope I am not over extending this thread. My posts frequently lack sufficient background, have unstated purpose or assumptions and are deficient in detail. I am an impatient writer and I would make a terrible teacher. TMF1000 is an example of providing the thoroughness that I lack.
So let me go back and build at least some foundation. First of all, “early warning” is incorrect both factually and grammatically. The proper naming would be “earlier warning” which raises the issue of “earlier than what?” Answer: earlier than the market’s realization and reaction. The market is forward looking. Earlier Warning means looking farther ahead. Earlier Warning means being able to react before the market does.
We might be able to do this with LGIH as the company lists only four analysts following LGIH (and only three showed up for the last earnings conference call.)
Gaucho Chris lists seven indicators to monitor. (Gaucho Chris, I always am pleased to see that you have posted on one of “my” boards. I make sure that I read them.) Six of the listed indicators are widely available on a national level, including housing supply. Housing supply in specific markets can also be found on Zillow or Trulia. Perhaps renting/buying data could be gleaned from Zillow. But this data is being reviewed by many analysts. This provides an early warning to revenue and profit for the industry. But it provides no time advantage to the market reaction and it requires effort. I think the price action of a home builder ETF would be just a timely and easier to track, but the damage to LGIH, the stock, will have already been done.
In order for LGIH to continue to grow as it has, they will have to continue geographic expansion—to be more national. That will make monitoring more numerous local real estate markets more and more difficult. On the other hand, Or you can just do what Saul does: track the average macro factors, watch the company’s results, and trust that management knows what they are doing.
Well, I’ll take two of the three: watch results and trust management. In fact, that is exactly what the lot inventory does. It tracks the results of sales and lot purchases. It trusts that management is correctly assessing opportunities for new communities and is allocating capital wisely. It assumes that quarterly filings and conference calls will report current results and provide the next quarter’s guidance. It assumes, however, that management will not be forthcoming with information that it is seeing a shortage of new community opportunities that meet its business model’s metrics (when and if this should occur).
I am not interested in delving into macroeconomic indicators. I am willing to monitor this microeconomic indicator of lot inventory, specific to LGIH, which requires little effort and which might, possibly, provide actionable information – earlier.
That leaves me with one more observation that I have been wanting to make for some time. It is kind of a bone to pick with accounting and financial results. There has been discussion of GAAP and non-GAAP results and the pros and cons of each. But at a more fundamental level, there is a basic problem with accounting of any kind. Accounting attempts to show the health of a business by converting all real world product development, marketing skill, production efficiency, management skill, etc., etc., into dollar terms. All this enormous complexity and capitalistic competition is rendered into a few pages of numbers with dollar signs attached. That is o.k., I suppose, for bankers or maybe for value investors. But what happens next is that analysts and investors then pour over the numbers, and like witch doctors delving through chicken entrails, try to reconstruct the reality of the business (product development, marketing skill, production efficiency management skill, capitalistic competition….) and predict future results more accurately than several hundred others who are fingering the same entrails.
Well, I suppose it is just me and my aversion to detail and tedium. So be it. ? Sorry for the length, just blame the hot, dry season that keeps me indoors much more than usual.