LGIH - Keeping things in perspective

Hey guys, this is May 11th. Three months ago, exactly, on Feb 11th, LGIH was at $19.49. On Monday of this week it rose about $1.40 to close at $29.60 in anticipation of earnings. That was up over $10, and up more than 50%, in three months.

Yesterday, Tuesday, they announced really, REALLY, terrific results, and the stock gave up Monday’s rise and 70 cents more. Who cares?

Look, earnings per share were up 72%! Revenue was up 35%! Average sales price was up 7%, showing no real margin pressure on them. In the conference call they anticipated raising prices sequentially every quarter. In spite of all the worry about Houston and the oil crisis, in Houston they were closing over 10 houses per community! They sold out of two Houston communities faster than they had anticipated, so they will be opening two more during the year. The conference call was a delight to listen to. Management was really content, sure of themselves, and happy about the future. The month of May will see more closings at higher prices than April. They’ll make at least $3.00 to $3.50 for the year, etc.

And this stock is selling at a PE of 10.8, lower than big companies that are growing at 5% per year.

Relax. Read the Conference Call transcript. Enjoy!


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I guess the way you’d really be an unsatisfied investor is if you’d filled out your position in October or November of 2015, at over $30/share. Even then the PE then was only 15 or 16 or so, so I’m guessing it looked like a screaming buy even at the higher prices (the YPEG surely looked great). I guess that’s why I say PE ratios can frustrate me. I just simply don’t have enough experience to relax – I want to understand why a company I perceive to have x growth potential and x risk trades at a wildly different PE ratio than another similar company which I perceive to have very similar growth potential and risk. Are my perceptions just wrong? Or is market irrationality at play? Which I think is a good thing to try to figure out. In the case of LGIH, it may be a little market irrationality (many investors probably aren’t interested b/c it’s not fashionable enough…but then again, most investors probably simply haven’t heard of LGIH), and a little more risk perceived by the market than by me (and I guess only time will tell who’s right).

I’ll take a stab at another question I posed:

But in your vast experience, Saul, what have you learned about how PE’s do or don’t get sorted out over time, in companies that keep growing and performing well every quarter?

Let’s think about GBX for example. With a PE of 4, what if that PE never expands? Not only that, but maybe earnings stagnate and so the growth never causes the share price to increase, even holding PE constant at 4. The company is making money – a lot of money based on the price of the stock. How do we get paid?

My answer would be increased dividend and share repurchases. I usually put a limited amount of thought into these…they’re nice, but in a rapidly growing company, they’re a small part of the picture. However, at a company who’s stock carries a PE of 4, they could be phenomenal. Just think about it – every year, they could buy back 25% of all shares outstanding!

Just what I’ve been pondering.




If the PE stays as is, and a company continues to grow, the stock goes up.

Think of a stock with earnings of a dollar and a price of 10. The PE is also 10. If earnings go to 1.35 and the PE is still 10 the math tells you the price is 13.50. A $1000 investment becomes a $1350.

If the PE never expands and a company is growing at a nice rate you will get returns of the growth rate. The risk that Saul avoids is the risk of substantial and lasting contraction of the multiple. Think of a stock with 10 dollar price and a penny of earnings, a 100 PE. let it double earnings to 2 cants. but give it a multiple of 50. your price did not move. Then think of the earnings of going to 3 cents but the multiple goes to 25- what is the stock price?

I think the best way to get comfortable with it is to spend a bit of time doing the math. Go look up some IPOs that came out at high multiples, SHAK comes to mind. Stocks that are bought wrong can have nice earning growth and still be losers on price.

That is why people get so anxious about a company like AMAZON, it takes a lot more understanding to get comfortable with a company that is a 250+ PE than something like GBX at 4.

You can see all my holding on my profile.


There are two fluid parts to the “PE” equation. The first component, price is very fluid as it changes daily. The second part, while changing less is still very fluid especially when trying to predict where earnings will be 1, 2, or 5 years out.

In my experience I don’t like it when the PE is too low - that usually means Mr. Market is saying that the earnings part of the equation has a high risk of declining or even disappearing.

As for LGIH it is assigned a low PE I think because the market believes there is risk for their earnings to be displaced - one they are a much smaller player compared to home builders and two because of exposure to the housing market where there is still a bad taste from 2008.

One can make significant profit if they believe the market is not evaluating a company properly. The market is not efficient in my opinion and that’s how the little guys can profit (with a little patience).



Think of a stock with 10 dollar price and a penny of earnings, a 100 PE.

Not to be picky, as I know it was just an example, but the PE above is 1000, not 100. It would be 100 if the earnings were $0.10.


Of course you are right, sorry I made a lazy mistake.

Thanks, Saul, for your reassuring post concerning LGIH.

I can report that even though oil prices are way down off their highs, the oil patch is alive and well. Real estate prices are only slightly off of the highs set when oil was at $100 a barrel.

I see nothing that will hurt a company like LGIH…at least here in Texas.


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PS Picked up a few more LGIH shares this afternoon after it got as low as 26.21.