LGI Homes (LGIH) – is a residential homebuilder based in The Woodlands, Texas. The company was founded in 2003 and it owns 93 communities in 17 states. The company designs, constructs, and sells new homes with offerings ranging from entry-level homes to townhomes to luxury homes under the Terrata Homes brand.
LGI has seen impressive growth in both sales and earnings over the last few years and at a time when home sales have struggled a little. Earnings have grown by 28% per year over the last three years while sales have grown at a rate of 31% over the same time period. Earnings and sales were both up 27% in the third quarter.
LGI sports a return on equity of 27.1% and a profit margin of 13.2%. These management efficiency measurements are average or above average.
It is also worth noting that the company’s valuation is pretty low right now with the stock trading at a P/E ratio of 11.5.
Sentiment toward the stock is pretty bearish at this time and that is surprising given how well the company has done fundamentally. There are only five analysts covering the stock at this time with two “buy” ratings, two “hold” ratings, and one “sell” rating. The buy percentage is low at 40% and having so few analysts covering the stock could be beneficial if new analysts add coverage with buy ratings.
The short interest ratio is at really high at 8.19. The average short interest ratio falls in the 3.0 range, so this means that short sellers are far more bearish on LGI than the average stock.
Looking at the weekly chart for LGI we see that the stock dropped in the last part of October and the beginning of November, but we see that the stock seems to have stabilized now. The stock has been hovering around the $70 level for the last four weeks and it could be building a base.
The weekly stochastic readings hit oversold territory a few weeks back and look as if they will make a bullish crossover this week or next week. The stock went through a similar pattern back last fall before it rallied over 100%.
Another thing that I like about the chart for LGI is the fact that the stock pulled back like it did, but it managed to remain above its 52-week and 104-week moving averages. These trend lines are still moving higher and could provide support for the stock going forward.
Suggested strategy: Buy LGIH with a maximum entry price of $72.00. I would set a target of at least $93.50 over the next 9 to 12 months. I would suggest a stop loss at the $64.00 level.
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