Investors Are Buying The Dip In LGI Homes Stock

Growth To Slow For LGI Homes

LGI Homes, Inc (NASDAQ:LGIH) is one of the smaller home builders but is no less important to the industry. The company has been quietly growing by double digits for the last several years and is on track to continue growing in 2021. The problem for the market right now is that growth is going to slow from the robust double-digit pace it has been setting to a more normalized mid-single-digit pace in 2021. That’s causing some weakness in the price action post-earnings release that we think is a good opportunity to buy. The stock is in a long-term uptrend, it’s made a stunning rebound from the 2020 lows, and the outlook for growth is still positive so there is no real reason to get bearish. There may be some more near-term consolidation but the long-term outlook for price-action is very bullish.

LGI Homes Set The Roof On Fire With Q4 Results

Anyone expecting LGI Homes to have a bad quarter has not been paying attention to the news. There is a rising demand for homes in the face of declining supply in the housing market and that is fueling what some have called a “golden age” for home builders. LGI’s Q4 results, however, are better than good in that revenue is up nearly 50% on a YOY basis and beat the consensus by more than 500 basis points and show just how strong the market is.

The revenue gains were driven by a 35.5% increase in closings that was compounded by a 9.3% increase in average selling price. Gains were also driven by a 9.3% increase in community count that provided the capacity for the new inventory.

Moving down the report, net income attributable to shareholders increased by 110% over last year on internal efficiencies, cost-leveraging, and the 48.2% increase in sales. At the gross level, the margin improved by 360 basis points while at the adjusted level it widened 330 bps. On the bottom line, the company’s $5.34 in GAAP earnings beat the consensus by $1.07 with similarly impressive results on an adjusted basis.

Looking forward, the company is guiding for growth but cautiously. The 9,300 to 9,800 expected closings is flat at the low end and up about 5% at the high end. Sales will be impacted by availability and may slow in the second half of the year if there is no new development. The company’s community count, which increased in 2020, is expected to shrink by low-single-digits this year. As for development, the company is well-capitalized for investment and reduced its debt by 1300 basis points so has plenty of ammunition when the time and property are right.

The Shorts Are Covering Their Bets In LGI Homes

There is an above-average amount of short-interest in shares of LGIH that investors should be aware of. The short-interest is running in the range of 10% compared to 2-5% for others in the home-building group and could lead this stock higher. The Q4 results and outlook are good enough to keep the price action above the short-term EMA which is not something the shorts want to see. The risk for them and opportunity for investors is that upward bias in price-action will continue to drive losses. If the shorts decide to leave en masse we could see this stock gain 5% to 10% rather quickly.

Technically speaking, the stock is trapped inside a trading range after setting new all-time highs but support is evident at the mid-point of the range. If price action closes the session below the EMA it may drift toward the bottom of the range over the next few weeks. If support is able to hold prices should edge higher until testing and/or breaking resistance at the $120 and $125 levels. A break of either will certainly put pressure on the shorts, whether it causes a short-squeeze is yet to be seen. Longer-term, with the housing market looking as good as it does we can’t help but see this stock trading at new all-time highs later this year.