GEO Investing

home builder stocksWhile GeoInvesting has had mixed success with tracking home builder stocks, we feel compelled to follow two, namely The New Home Company Inc. (NWHM) and LGI Homes, Inc. (LGIH) that have strong analyst estimates and continued healthy demand and backlog for their products.  It’s been a while since we have actively tracked any home builders. GeoInvesting had success with two out of three home builder stocks in the period from 2012 to 2013.

  • Bought Hovnanian Enterprises Inc. (HOV) in September 2012 and sold in November 2012 for a gain of about 40%.

  • Bought William Lyon Homes William Lyon Homes (WLH) in March 2013 and sold in October 2013 for a gain of about 36%

  • Bought Comstock Holding Companies, Inc. (CHCI) April 2013 and sold in September 2013 for a loss of about 35%

Our experience with CHCI left a bad taste. However, an improving U.S. economy, combined with a possibility that consumers may accelerate their home buying decisions in anticipation of increasing interest rates in the near future, could provide increased visibility into the home building industry.

Two Home Builder Stocks GeoInvesting Began Tracking

We began tracking The New Home Company Inc. (NWHM) because:

  • It appears growth is about to accelerate in 2015 and 2016, Revenues came in at $150 million in 2014 and are expected to increase 170% to $405 million in 2015 followed by a 56% increase in 2016 to $633 million.

  • Earnings per share are expected to reach $1.40 in 2015, and $2.30 in 2016 up from $0.30 in 2014

  • Company’s strong backlog supports the bullish analysts estimates (2014 year end backlog grew 6x to $87 million)

  • According to a recent Seeking Alpha article The company’s shares are selling way below its peers (30% to 50% discount)

  • Credit Suisse recently up price target to $18 from $16

Here are some comments from the Q4 2014 press release:

“2014 was a transitional year for the Company. As a result of our IPO in January 2014, we significantly expanded our operations across all project activities. We delivered another year of profitable results while investing in our platform to meet our growth objectives in the years ahead,” stated Larry Webb, Chief Executive Officer. “During the fourth quarter 2014, we were especially pleased with our results, which reflected our transformation from a private company to a public company. This transformation resulted in strong growth in our revenues, improved leverage of our G&A and continued progress in our JV operations, all of which contributed to growth in our net income. We entered 2015 with a dramatically strengthened backlog and a healthy pipeline of well located, premium lots in highly desirable California markets. As we move forward, our growth strategy remains intact. We are well positioned to continue acquiring land and opening communities across our vibrant markets as we expand our business and further capitalize on the attractive opportunities.”

We began tracking LGI Homes, Inc. (LGIH) for the following reasons:

  • After growing revenue by 60% in 2014 to $383 million, revenue is expected to grow to $548 million in 2015 and $703 million in 2016.

  • The company is diversifying geographically outside of its main market (Texas)

Management commentary from Q4 2014

“This has been a momentous year for LGI Homes,” said Eric Lipar, the Company’s Chief Executive Officer and Chairman of the Board. “Our fourth quarter provided a solid finish to the year. We ended 2014 with record breaking results of 2,356 homes closed which exceeded expectations. This 45% year-over-year increase marks the fourth consecutive year we have grown home closings by more than 40%. In addition to delivering great results during our first full year as a public company, we also acquired our first home builder, entered the Denver and Charlotte markets, and launched our new move-up brand, Terrata Homes.”

“Turning our attention to 2015, we kicked off the year with solid results closing 373 homes during the first two months. We continue to see strong demand for homeownership in our markets and uphold a positive outlook on the year.”

Home Builder Stocks Caveats

  • Investor sentiment for housing stocks can be very fickle and change quarter to quarter depending on housing data. So investors who play in this space may need a longer term horizon.

  • Both of these companies have limited geographic diversification.

We encourage readers to read Seeking Alpha articles on LGIH and NWHM published by O’Neil Trader which summarizes part of the bullish theses for these two companies.

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