I just sent this suggestion to Investor Relations:
I’d like to suggest that by announcing your closings every month, you are driving your stockholders crazy. Can you imagine a company in another field announcing sales every month, for instance? One month up and everyone is euphoric, one month down and everyone thinks you are going out of business.
I’d also suggest you guide to revenue (sales) and earnings, and not to a raw number of closings which becomes irrelevant when some are for $170,000 and others for $400,000.
Think about it! They had record sales and earnings in the December quarter. But then, in one quarter, because of monthly announcements of closings, they’ve had bunches of people saying they’ve lost confidence in management. 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.
Think of your favorite company. Say a restaurant chain. And they posted monthly sales. Bad weather in a couple of their markets and sales way down. Then the next month sales way up. It’s ridiculous to post monthly results.
Or an industrial company that makes a big sale one month and has large revenue, and the next doesn’t have a comparable sale, and revenue way down.
Or a jeweler who reported every month how many necklaces they sold although some are for $170 and some are for $450, but all you get is a raw number of necklaces. That made sense when they first started out and all their necklaces were $150, but it’s an obsolete figure now. (That’s house closings, for anyone who hasn’t figured it out). And why report them every month?
Thank you Saul, I have the same sentiment but could never have stated it so simply! There are problems enough with quarterly detailed earnings releases because of the “analyst estimates” game you have often warned us of and here everyone is getting tied up in knots over a company releasing monthly numbers which can’t even predict revenue thanks to an ever increasing variable sales price?
I am very impressed by some of the analysis from members of this board, in particular the analysis Chris performed of homes sold per active selling community. Very interesting, a wonderful perspective on the scope of the issue, and it helped me immensely to understand what is going into some of the numbers reported by LGIH management. Yet even with this insightful analysis, it seems to me we must remember this is an analysis of a number of sales that cannot be linked directly to revenue and earnings!
Saul, you just explained why I love long term charts!
Except home building is cyclical making it much harder to invest in. I was doing OK in a past cycle but I didn’t know when to get out. I learned to avoid cyclical industries but I thought I was safe in oil coming from an oil country. In 2014 OPEC announced it was flooding the market to drive out shale producers. I didn’t think it was a smart move. I wrote that OPEC was trying to give shale “a good sweating” to use a favorite John D. Rockefeller saying except that shale might give OPEC a good sweating instead which is what happened.
By October 2014 Brent was down to around $50 and I though it was safe to enter the market. I found myself an asset-light oil service company to invest in, Core Labs (CLB)
I was right in that CLB had already had its cycle bottom but despite that I’m still struggling to make a profit in the stock, oil is back to where it was 18 months ago. Experts disagree on where oil inventories are heading, glut or scarcity. Mr. Market is one tough taskmaster.
I’m not making any predictions about home building but once you buy a cyclical stock and start making money your focus shifts from finding the bottom to avoiding the top that is sure to come…
Totally agree with you, Saul that reporting monthly closings does not make sense.
However, I am also wondering if the low PE for a homebuilder could simply indicate the top in profitability for this cycle?
Denny make a very good point that with cyclical stock the focus should be on avoiding the top.
My understanding is that LGIH PE has always substantially lagged other homebuilders. If their next quarterly report is very good we may start to see a PE expansion? I really don’t know.
I certainly agree that there could be a cyclical risk (although the lowest unemployment rate in ten years doesn’t look like a recession is imminent), but saying there is a cyclical risk is very different than saying you’ve lost confidence in a management that has been doing beyond great for the last four years, because of one quarter’s closings, which is what I was hearing a lot of.
“Losing confidence in management” is a very strong statement that should only be used based on solid evidence but at the same time, I have about as much confidence in the government’s unemployment numbers as I have in a three dollar bill! LOL
I think that anyone invested in this stock should want those monthly housing sales. While it might make people uncomfortable that are invested in the stock it will be an important data point. They have been putting out these reports for years so you actually have viable data points that everyone can follow. So if they stop doing those monthly reports it will not give you more visibility into the company.
Lets say LGIH has record Revenues and Earnings with the same number of communities being sold, but their sales of homes are cut in half. That could be a very important sign that LGIH is at the top and should be sold.
I am in that same emotional csmp, but I recall a conversation with a builder that built from the mid sixies to the late 1970’s.
He thought people would stop buying houses when interest rates jumped 50 percent from 4 to 6 percent. Then when they jumped another 50 percent to 9 percent he thought he was done for.
He quit building houses before the Fed raised rates in 82 and cuased that recession.
However, he built and prospered through both of the deep recessions of the 1970’s. (Note: Southeast Texas due to its energy infristructure did not participate in those recessions)
anyone invested in this stock should want those monthly housing sales… it will be an important data point.
Hi Andy, I presume then that you would want every company you are invested in to give equivalent figures like monthly sales, or monthly widgets sold, for more data points. And reporting weekly sales would be even better as it would give you four times more data points, and you could pick up trends earlier. Or daily…
Well, I guess it would make sense if you were a short term trader, but otherwise, with more and more data points, I’m sure you would agree that you’d lose sight of the forest for the trees. It would get harder and harder to step back and see what is actually going on with the company, and incline one to make more and more short term decisions. Even Shopify, growing at 75% per year, probably has weeks when year-over-year revenue growth is only 55% or 60%, and other weeks when year-over-year revenue growth is 90% or 95%. If they announced an 85% growth week, and then a 65% growth week, and the third week announced a 55% growth week, you just might get scared that you were seeing a trend the company has hit a wall, and sell all or part of your position, because of semi-random fluctuations in an overall picture that hasn’t changed at all.
You probably think that weekly announcements would be silly. I think monthly announcements are silly and excessive, and possibly misleading. So we are not disagreeing, just drawing our line in different places.
Then the next month sales way up. It’s ridiculous to post monthly results.
There are many retailer post monthly comps. Not sure why you think 3 months is better than 1 month? The results are not going to change whether you announce monthly closing vs 3 month quarterly earnings announcement. Every business has its ebb and flows, and the investors have to figure out themselves. If the monthly closing data introduces bit volatility, I would say it is good for investors like you, who understand the big picture and trade with conviction.
I would say LGIH is not that investor friendly. The company announces only closings vs standard industry metrics of sales, which should not matter really. I don’t see any investor presentation on their web site. So why cut one piece of information they are sharing with the customers?
Hi Andy, I presume then that you would want every company you are invested in to give equivalent figures like monthly sales, or monthly widgets sold, for more data points. And reporting weekly sales would be even better as it would give you four times more data points, and you could pick up trends earlier. Or daily…
Hi Saul,
Actually I would rather that my companies only gave yearly reports. But alas they give quarterly reports :). But I would question a company if they were giving reports on their business and then stopped giving them. Especially if the numbers start going down. I do not think you are wrong Saul that Revenue and Earnings should power the company but I do think the number of communities and houses sold is important also. Maybe they should just give those numbers when they report their earnings.
Monthly sales numbers being reported is unlikely to go away anytime soon in my opinion, regardless of your stance.
Residential construction is just that way. It’s the same argument(mine anyway) about everyone always wanting to know what the $/SF (square foot) price is?
Well, a 1,000 SF house with carpet, cheap doors and laminate counter tops isn’t the same as a 1,000 SF house with hardwood floors, solid wood doors and granite tops. We won’t even get into lot size, retaining walls, sidewalks, sprinklers, exterior lighting, landscaping, etc. that have zero to do with the actual SF of the house.
Do you value a VW bug and Porsche based on how many pounds they weigh?
Let’s go deeper than just a single house sold. Let’s use windows. I built homes with 20 windows and some homes with similar SF totals with 60, 70+ windows in a single house!
No big deal?
It affects:
Window salesman. Obvious.
Lumber. Higher amount of waste due to more openings, cutting lumber to fit.
Labor. Framer has to account for more time to cut 70 windows in than 20.
Insulation. Little effect, material & labor.
Sheetrock. More waste, more labor.
Corner metal. Lots more material, more labor.
Cladding (siding, brick, stone, whatever). More waste, more labor.
Trim for cladding. Lots more material, more labor.
Painting. Interior and exterior (if required). More masking. More labor.
Count me out as a fan of announcing monthly housing units sold.
You’ve got a company telling you the truth, the whole truth, and nothing but the truth, and you’re complaining about that??!!???
Rational, unemotional investors can take that monthly data and use it for various analyses. You can follow the trend of closings. You can make your own seasonal adjustments. You can compare 3 months of closing to quarterly sales in dollars to see if they’re selling higher end or lower end houses.
But because a few investors can’t keep their emotions in check, you think they should stop reporting factual data?
No. Let the fools jump in and out based on the direction the wind is blowing. Take advantage of their foolishness, if you can figure out how.
Automobile companies typically post monthly sales figures. Even those that don’t, like Tesla, have estimates provided by companies that track this stuff. And just as homes are variably priced, so are cars.
I suspect management at many (most?) companies look at sales data on a weekly basis internally. That’s useful since they typically have detailed models of what the data should be an why. Is their current promotion working as expected? Do they have to start the next promotion sooner, or perhaps they can delay it?
Again, for automotive, monthly data has been available for so long now that the market has learned what to expect from it They know which of the months are key for the quarter and which aren’t. If you’re the kind of investor that wants to catch a trend early on, then I could see where you’d want that data. In automotive, they have historical yearly trends for decades against which to compare. I suspect LGIH doesn’t have that kind of history.
I’m not weighing in on whether LGIH should or shouldn’t report monthly sales data, just that it does apparently work in some other industries.
I know I am coming to this late, and after LGIH is soaring, but it seems to me you have ignored the advantage to having investors an analysts in a monthly uproar over closings. All this angst makes buying opportunities. How often have you added a bit of LGIH when the prices was down? And cashed a bit in when it was up? Would you have made out as well if people didn’t go a bit crazy?
However I have to ask, since it’s pretty clear to you and by virtue all of us now that monthly closing numbers are meaningless, any stock movement can present opportunity to us. Why would you want to put a stop to that?
I am not saying market reaction to every stock every time is wrong. But in this case you nailed the reason why market could be way off. We could now use this information to our advantage and buy more if we so desire when the market sells it off. And maybe lighten if we so choose when the market gets euphoric for unnecessary reasons.
