ANET? yes they are but the stock has not gone anywhere in more than a year.
Is that our goal here - or even our metric? Did you say the same thing about TSLA in 2012?
Arista is a disruptive technology in an area ripe for innovation, and the big behemoths like Cisco are, IMO, going down. Software Defined Networking looks be potentially worthy of a new chapter in “The Innovator’s Dilemma.” Cisco didn’t sue them for fun - Cisco is scared. And rightfully so.
A stock I’m most curious about is LGIH. The market simply does not believe the story. Why?
You mentioned the low (appearing) p/e of 10. But if you do some research on housing stocks, you’ll see that it is fairly common for the market to give them p/e ratios in the 8-12 range. That’s because housing tends to be highly cyclical and somewhat unpredictable. Same thing goes for most financial stocks. Or airlines, automakers, heavy industrials, etc. It is what it is.
And if you check the news, you’ll see that another company that’s similar to LGIH – namely KB Home – missed its numbers, and (as others here have noted) the Texas market, where LGIH does a lot of business, is soft.
Please note: I am not offering an opinion one way or the other on LGIH. I’m merely pointing out that (1) a low p/e (or PEG) by itself tells you very little, and (2) investing involves more than just spreadsheets and numbers. (I’m confident that Saul would agree with both of these observations.)
Please take your approach to an appropriate board.
I, for one, would prefer to see substantive rebuttals to the points arindam makes (and that other informed critics make). Group-think is not your friend when it comes to investing.
You mentioned the low (appearing) p/e of 10. But if you do some research on housing stocks, you’ll see that it is fairly common for the market to give them p/e ratios in the 8-12 range. That’s because housing tends to be highly cyclical and somewhat unpredictable. Same thing goes for most financial stocks. Or airlines, automakers, heavy industrials, etc. It is what it is. And if you check the news, you’ll see that another company that’s similar to LGIH – namely KB Home – missed its numbers, and (as others here have noted) the Texas market, where LGIH does a lot of business, is soft.
Hi Mr. Fungi,
I think the difference is that LGIH is being lumped with the other building stocks. However
Their revenue was up 87% last quarter. Revenue! 87%! In the oil patch! It was up over 50% the quarter before. That’s not your typical housing stock.
Maybe KB missed its numbers but LGIH already pre-announced all time record closings for the Dec quarter. And annual closings up 44.5% from the previous years record annual closings. And an outlook (which they expect to beat of “over 4000” closings this year, in the oil patch, etc.
Average price of houses sold the first nine months was $184 thousand, up from about $161 thousand! In the oil patch! In Texas!
To me a PE of 9.5 for a company like that sounds awfully cheap. But it’s just my opinion.
Saul
Re LGIH, Saul writes:
1. Their revenue was up 87% last quarter. Revenue! 87%! In the oil patch! It was up over 50% the quarter before. That’s not your typical housing stock…
I agree. But I’ve read their 10-Qs and most recent 10-K, I visited their website and looked at the houses they sell, I read the bios of the company execs, and I have to say, I don’t see anything special there. What am I missing?
It’s a relatively young company, the houses are modest tract homes, and the execs are fairly young. And, as you note, they are trying to swim upstream in a soft Texas market. They have a lot of money tied up in land and inventory, and cash flow is squeezed.
And nearly a quarter of the float is bet short against the stock.
So I am led to wonder: is the huge increase in sales a one-time spike, never to be repeated, what with interest rates probably heading higher, the Texas market still over-housed, and surveys showing that young couples and families are much less interested in home ownership than past generations were? Or are these guys really that much smarter than all the other people in the homebuilding business? Are they offering a product that is special in some way?
I have no position, long or short, in LGIH. I’m merely putting my thoughts down here if anyone cares to comment or critique. Thanks.
Where the Hell is the “ignore user” button???
KC
Frownie face.
In the oil patch! In Texas!
I don’t understand your emphasis here. Housing in the Texas Oil Patch has been very hot. Here’s a link:
http://www.dallasnews.com/business/residential-real-estate/2…
Housing analysts expect the Dallas-Fort Worth home market to level off this year from the all-time highs reached in 2015.
Prices and sales are forecast to increase in 2016 — just not at such rapid rates.
So, it shouldn’t be a surprise that companies selling homes there did well last year - it was an all-time high overall.
What makes you think LGIH will prosper even as the market there cools?
"Is that our goal here - or even our metric? Did you say the same thing about TSLA in 2012? "
our goal? more like our hope. Metric? no. You did not have to wait that long if you got in TSLA in 2012.
Christensen’s framework is interesting but it is not an investing method.
innovation is a weed. It’s everywhere. It certainly does not translate necessarily into capital gains for a public stock investor all or most of the time.
tj
Regarding LGIH:
From their quarterly balance sheets: ‘Payables’ are roughly 5x ‘Receivables’. (This company can’t pay its bills.) But is it a ‘short’? Ah, that’s the more interesting question, right
Does that ratio generally mean anything? Anyway, if it does, one should always ask “Does this situation fall within the simplifications made for the evaluation model?”
For LGIH, what are the receivables? What are the payables? The receivables for LGIH are from home sales, which are recognized at closing. The money is received “after a few days”. I calculate, roughly, that at year-end, the receivables were about 7 days sales considering average sale price and average number of homes sold per day. If you are paying 30-days and receiving in 7 days does this ratio mean that you can’t pay the bills?
KC
You did not have to wait that long if you got in TSLA in 2012.
I got in in 2011. If I gave up after a year, I would have missed out big time.
innovation is a weed. It’s everywhere. It certainly does not translate necessarily into capital gains for a public stock investor all or most of the time.
Either you haven’t actually read the book, or you don’t understand completely what it’s about. It’s about a particular type of innovation commonly labeled disruption. Disruption can be a harbinger for great stock market returns, IMHO.
I don’t understand your emphasis here. Housing in the Texas Oil Patch has been very hot
That’s exactly what I was pointing out. That 2015 was very poor for oil prices, and LGIH (and the Texas housing market) was very hot anyway.
What makes you think LGIH will prosper even as the market there cools?
What makes you think the market there is about to cool?
Saul
What makes you think the market there is about to cool? - Saul
There is this (it may require a subscription):
http://www.wsj.com/articles/oil-slump-hits-houston-home-mark…
HOUSTON—Home sellers are slashing prices and offering incentives to keep buyers from walking away from contracts as an 18-month oil slump buffets this city’s once-booming housing market.
“While Houston has figured out how to diversify [its industry makeup] a lot, we still are an oil-and-gas city,” said Scott Merovitch, Houston division president for closely held builder Chesmar Homes LP, which saw a higher cancellation rate in Houston in 2015 and notched 20% fewer sales. “We’re going to ebb and flow with oil and gas.”
Different areas are going to be affected differently, but I would think that oil-centric cities (and states?) might experience some problems. The above article is just one data point, but it seems plausible that a dramatic shift in oil might be a problem for housing markets.
The article notes that the difficulties in housing have taken a long time to materialize.
Best regards,
Kathie
I see that my reply was pulled. So I’m re-posting, re-wording the part that was apparently found offensive by someone:
Five of those six are just “Beta Bets” for having tight, 0.96-0.98 correlations with the broad market and merit no present attention.
The correlation between daily closing prices of SWKS and the S&P 500 over the past year is 0.51. For CASY it is -0.26. For SKX it is -0.15. I didn’t bother doing the others, since it was clear that your “correlations” had no basis in fact.
What makes you think the market there is about to cool?
Oil worries seep into housing outlook: http://www.dallasnews.com/business/residential-real-estate/2…
Oil Patch slowdown has analysts forecasting a slower housing market for North Texas: http://www.dallasnews.com/business/columnists/steve-brown/20…
Texas oil and gas “Boom-to-Bust” prediction: http://www.fox26houston.com/news/local-news/70433661-story
Oil slump weighing on housing markets in Texas, North Dakota: http://www.fortworthbusiness.com/collin_county_business_pres…
Did you even read past those headlines? Here are some quotes from those articles:
Oil worries seep into housing outlook…
Prices and sales are forecast to increase in 2016 — just not at such rapid rates.
and
Oil Patch slowdown has analysts forecasting a slower housing market for North Texas
Sales of homes are at record levels and would be even higher if there were more houses to sell.
and
Texas oil and gas “Boom-to-Bust” prediction…
Construction cranes are still part of Austin’s skyline. An indication of good economic times… If there is a housing price correction it may not be big according to Arch Mortgage Insurance. Compared to other energy producing states the risk in Texas is considered to be the lowest.
and
Oil slump weighing on housing markets in Texas, North Dakota
Despite the softer sales, home prices have mostly held up in oil-reliant markets… the two cities continue to have a seller-friendly four-month supply of homes for sale. That’s more than the two months they had before the oil slump, but still representative of a tight market for homes. A six-month supply of homes is what economists consider a balanced market.
The headlines are sensational, designed to grab eyeballs.
I’m not saying housing markets won’t fall in areas that would impact LGIH. But so far, the facts speak very differently. And then you have to ask, if the overall market does see a decline, how much of that decline will actually hit the part of the market in which LHIG is positioned (mostly the starter home market)? And then how much will the company be able to react over the coming years, diversifying and repositioning? And then if low oil does have an impact, are we assuming oil will stay at record lows forever?
I don’t know what LGIH will do any better than anyone else, but I think the least people can do is look at the facts and perform their own reasoned analysis instead of taking sensational headlines at face value.
Just my 2 cents.
Neil
Long LGIH
I have a friend who just moved to the center of the West Texas oil patch. Despite the bust of the boom ,housing and rental prices are still high compared to other parts of Texas and similar areas .
Since it takes so long to get permits and actually build housing, prices seem to lag oil prices. Drilling itself lags prices.
And maybe some of the recently unemployed are waiting for the boom to reignite so are still occupying apartments and homes.
Since oil is the base of the economy in paces like Midlands it is hard to see price declines of this nature not having a bad effect.
I think very few fracked wells in Texas can be drilled profitably at $27/bbl.
What makes you think the market there is about to cool?
Oil worries seep into housing outlook:
Let’s see. Your first article here says:
Prices and sales are forecast to increase in 2016 — just not at such rapid rates…It will be tough for us to see more than about 10 percent growth next year. We ought to be building more than 30,000 homes.
Wow! Sounds terrible!
Oil Patch slowdown has analysts forecasting a slower housing market for North Texas:
Now this one was dated April 2015!!! And was totally wrong, as there were record housing sales in North Texas in 2015.
Texas oil and gas “Boom-to-Bust” prediction:
And this one says: Construction cranes are still part of Austin’s skyline. An indication of good economic times…If there is a housing price correction it may not be big according to Arch Mortgage Insurance. Compared to other energy producing states the risk in Texas is considered to be the lowest.
Oil slump weighing on housing markets in Texas, North Dakota:
This one says: While some markets in Texas are slowing, the statewide figures still show overall home sales accelerating and prices rising. The big Texas markets of Dallas-Fort Worth and Austin have hardly been affected at all, according to RealtyTrac figures, partly because those markets have diverse economies that are less reliant on energy.
Did you read these or just collect the headlines? What here makes you think LGIH is only worth 8 or 9 times earnings?
Saul
What makes you think the market there is about to cool? - Saul
There is this:
http://www.wsj.com/articles/oil-slump-hits-houston-home-mark……
HOUSTON—Home sellers are slashing prices and offering incentives to keep buyers from walking away from contracts as an 18-month oil slump buffets this city’s once-booming housing market.
“While Houston has figured out how to diversify [its industry makeup] a lot, we still are an oil-and-gas city,” said Scott Merovitch, Houston division president for closely held builder Chesmar Homes LP, which saw a higher cancellation rate in Houston in 2015 and notched 20% fewer sales.
You’re saying you think the market is about to cool because of a home builder that saw 2015 sales drop 20%, but we’re talking about LGIH which saw a large INCREASE in sales in 2015. I agree, I want nothing to do with Chesmar Homes.
Did you read these or just collect the headlines?
I read the articles and didn’t cherry-pick quotes. The overall concern is that drastically low oil prices will impact housing in a region that is heavily dependent on oil-related jobs. Previous low oil price conditions have had a direct impact on the housing markets there.
What here makes you think LGIH is only worth 8 or 9 times earnings?
I never stated that. I simply asked why you thought LGIH would do well even if the housing market there cools.
If you don’t think the housing market there is going to cool, that answers the first question. However, that does seem to be a risk there.