LGIH loss of confidence - a reprise

Investment Analysis Clubs Saul’s Investing Discussions
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A month ago (May 6th to be exact), I wrote the following in response to a bunch of people on the board saying they were selling out of their LGIH because of a few weak months of closings. I said they weren’t seeing the forest for the trees, and even suggested that it would be better if the company didn’t report monthly closings.

Here’s what I wrote (slightly paraphrased):

Think about it! They had record sales and earnings in the December quarter. But then, in one quarter, because of monthly announcements of closings, we’ve had bunches of people on the board saying they’ve lost confidence in management and selling out. In one quarter! They have a management who has had yearly earnings go:

043
107
138
250
340

and revenues go:

143
246
383
630
838 !!!

Take a good look at those figures:
In four years earnings are up 700%. And sales are up 500%…
In FOUR f…g YEARS!

And you have “lost confidence in management” and you are selling out because of one quarters closings? Without even seeing revenue and earnings? And you are selling out with the stock at less than nine times earnings!? You have lost confidence in management??? Sorry for getting exclamatory about it, but it’s driving me bats…

Here’s what they had said in the last conference call:

The primary reason that our closings are down year-over-year as that we had strong closings in December 2016 and our inventory of completed homes (available to sell) during Q1 was not as high as we would have liked.

We entered 2016 with 1560 homes at various stages compared to 1710 homes at the end of 2015 giving us fewer homes to close in the first quarter. We believe the situation will correct itself in the next few months as we are bringing new inventory online with additional homes under construction and the completion of new development sections.

As we continue to build back our inventory, we are continuing to sell homes. Sales over the last 90 days have been very strong. We have had over 500 net sales in each of the month of February, March and April. We currently have more homes under contract than we have had at any one time in our company history.

Could they have been any clearer? I could see if someone wanted to trim a very oversized position. I did a little myself. But sell out? Because you lost confidence in management (which has been killing it for four years) because of one quarter’s results? No…

Best,

Saul

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Thank you Saul. Your confidence got me in today. I had been looking for a new relatively cheap investment and there aren’t many that I would put in that category right now. After reading your posts on LGIH for a few weeks and doing some other research I opened a position in them today. The forward P/E of <9 and YPEG well under 1 finally sucked me in over the likes of TLND. Really appreciate your persistence on this one and the excellent posts regarding why it’s still a great investment.

MC

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Thank you Saul. Your confidence got me in today. I had been looking for a new relatively cheap investment and there aren’t many that I would put in that category right now. After reading your posts on LGIH for a few weeks and doing some other research I opened a position in them today.

Hi MC,

Thanks for your confidence, but I sure hope you invested based on the merits as you see them, and not just because I liked it. Remember I’m just an amateur like you, and also I can and do change my mind on stocks from time to time. I do hope it works out for you, though!

Saul

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A month ago (May 6th to be exact), I wrote the following in response to a bunch of people on the board saying they were selling out of their LGIH because of a few weak months of closings.

I’ll count myself among those who doubted, although I was doing the math and I said they’d have to have a huge jump in ASP to like 213,500 to hit their earnings target. Well, they managed 214,075 and beat by 2 cents. So my math was pretty good, but I was wrong to doubt that they could get there. The Southwest and Northwest sales prices are very strong, so I should have seen that coming.

Now that they have closed more in April and May than in the entire first quarter, I’ve become a believer again. The May closings number was a huge confidence boost for me. It was good to see them come through on what they said they would do, as I recalled on the CC in March they said they’d be between 375 and 425 for the month and only ended up closing 365 (http://discussion.fool.com/one-other-point-let39s-not-forget-the…).

So here’s what I’m getting to: why isn’t this shaking off the shorts? Almost 25% of shares are held short. Based on the 5% bump in shares yesterday, maybe a few got out, but I can’t imagine that it was a lot. What are they doing?!? It seems like with even a half-decent June LGIH could have a beat on revenue and a huge beat on EPS pretty easily in Q2. 425 closings in June would be enough, and that’s even if ASP just holds steady with Q1…and depending on the sales mix obviously it could be higher.

I’ve actually gone long LGIH once again and would be terrified to be short LGIH. Just wondering what would keep the doubters doubting…

Bear

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So here’s what I’m getting to: why isn’t this shaking off the shorts? Almost 25% of shares are held short. Based on the 5% bump in shares yesterday, maybe a few got out, but I can’t imagine that it was a lot. What are they doing?!? It seems like with even a half-decent June LGIH could have a beat on revenue and a huge beat on EPS pretty easily in Q2. 425 closings in June would be enough, and that’s even if ASP just holds steady with Q1…and depending on the sales mix obviously it could be higher.

Bear,

I too sold half my shares in April but I bought them all back in May after I created the 2017 model which convinced me that they will likely hit their 4800 sales guidance for 2017. In fact, I think my model which predicted 4886 closing for 2017 is a low estimate. I think the actual number will probably come in above 5000. We’ll see. Anyway, employment numbers look great, interest rate on the 10 year bond has dropped again, and inflation is having trouble rising. These figures bode well for new home purchases so I expect that if unemployment, interest rates, and inflation continue to cooperate then we will see very strong sales in new housing for the rest of 2017.

What are the shorts thinking? Who knows. I don’t really care what they do as long as LGIH keeps delivering.

Chris

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