LGI Homes Has Built A New Base; Can You Spot The Potential Flaw?
me stocks are prone to making much larger moves than the rest of the market, both up or down, and no matter how great the current fundamentals. The Woodlands, Texas-based builder LGI Homes stars in this category.
LGI Homes (LGIH) made a big splash in the second half of last year. On Aug. 5, the stock soared 23%, easily clearing a 20.20 buy point within a 12-month cup with handle. The cup with handle serves as one of the most important patterns that are formed by leading stocks just as they begin big price rallies to new highs.
That August 2015 breakout ushered a strong move. In just two trading sessions, LGI rose more than 20% past the proper entry point; a stock that breaks out and rallies at least 20% in three weeks’ time or less should be held a minimum eight weeks. That gives the a potential big growth stock some room to run. Eight weeks later, LGI was near 27, up more than 33% past the 20.20 entry. And the stock was positioned nicely above its fast-rising 50-day moving average
How about today? LGI’s rebound has been solid. And over the past two weeks, the stock has formed a handle that furnishes a 29.87 buy point, 10 cents above the handle’s highest price of 29.77. The handle passes the midpoint test (28.27 for the handle vs. 27.41 for the base). One serious concern, however, is the fact that at 29.87, the stock would still be more than 17% below the base’s high. Normally, a great stock breaks out only after it’s risen to within 5% to 15% of the base’s high. Such a rebound implies that the stock has powered past a potential overhead supply of shareholders who are sitting with losses and are eager to unload their shares.
When LGI broke out successfully in August last year, the pivot point of 20.20 was only 9% below the base’s left-side high of 22.21.
I would also prefer to see up volume on the right side of the base equal or exceed down volume on the left. I don’t see that yet, but it is pretty close.
LGI’s Q1 report arrives on May 10. Analysts polled by Thomson Reuters see earnings rising 58% to 52 cents a share. That’s an impressive forecast, especially given that in the first quarter of last year, earnings ramped up 50% vs. year-earlier levels to 33 cents a share.
Revenue is expected to climb nearly 39% to $167.6 million. Just two analysts, however, currently provide a sales estimate; the low forecast is $158.6 million, well below the other analyst’s estimate of $176.5 million.
Investors will likely home in on the Q2 and full-year outlook, given that the company is expanding rapidly beyond its home base in the Lone Star state and into states including Florida, Georgia, North Carolina, South Carolina, Arizona, New Mexico, Colorado and Washington. On April 5, LGI reported it closed deals on 367 new homes in March, up 23% from 298 in the same month a year earlier. First-quarter closings jumped 26% to 844 vs. 671
Earnings will resolve everything