Is LGI Homes (LGIH) a Smart Long-Term Investment?

Moon Capital Management, an investment management firm, published its first-quarter 2022 investor letter – a copy of which can be seen here. Stock prices generally continued their decline in the first quarter, with the tech-heavy Nasdaq Composite posting the largest loss among the three major U.S. indices. The fund’s stock portfolio held up well, declining approximately one-half percent. Try to spend some time taking a look at the fund’s top 5 holdings to be informed about their best picks for 2022.

In its Q1 2022 investor letter, Moon Capital Management mentioned LGI Homes, Inc. (NASDAQ:LGIH) and explained its insights for the company. Founded in 2003, LGI Homes, Inc. (NASDAQ:LGIH)  is a Texas-based home builder and developer with a $2.1 billion market capitalization. LGI Homes, Inc. (NASDAQ:LGIH)  delivered a -41.64% return since the beginning of the year, while its 12-month returns are down by -44.71%. The stock closed at $90.15 per share on April 12, 2022.

Here is what Moon Capital Management has to say about LGI Homes, Inc. (NASDAQ:LGIH) in its Q1 2022 investor letter:

“Aligning with this theme, we recently purchased shares of homebuilder LGI Homes (LGIH), a company we have previously owned.  By coincidence, our purchase price of $118 per share was approximately equal to the price at which we sold the stock less than two years ago.  And although we repurchased the shares at 2020 prices, the company’s earnings have increased 70 percent since then.

The biggest risk to this investment is that the company is currently “over-earning.” Not only are average home sales prices much higher than anyone expected, but unprecedented high demand for new homes has reduced the company’s need for marketing expenses. This combination has resulted in historically high margins for all homebuilders, including LGIH.

However, the difference between LGIH and most other homebuilders is that LGIH operated a great business pre-covid.  In fact, LGIH was even growing and increasing earnings in the wake of the 2008 housing crisis, when the homebuilding environment was terrible.

Yet, even if the company’s earnings are abnormally high, our purchase price of less than 7 times earnings is a bargain. We estimate that LGIH will have generated $50 per share of incremental equity capital in the three years from 2020-2022.   If we assume the company can reinvest that capital at a 20 percent return on equity (well below the company’s recent returns) that incremental capital would produce an additional $10 per share in normalized earnings.  Combined with the company’s pre-covid earnings profile, LGIH should continue generating more than $17 of earnings per share, even assuming a significant profit normalization.

In three years, we expect LGIH to be generating more than $20 per share in earnings, even assuming complete earnings normalization back to historical trends.  At 12 times earnings (it generally trades at that price at some point every year), it would be a $240 stock, which equates to a more than 25 percent annual return on our purchase price of $118 per share.”


Our calculations show that LGI Homes, Inc. (NASDAQ:LGIH) fell short and didn’t make it on our list of the 30 Most Popular Stocks Among Hedge Funds. LGI Homes, Inc. (NASDAQ:LGIH) was in 21 hedge fund portfolios at the end of the first quarter of 2022, compared to 15 funds in the previous quarter. LGI Homes, Inc. (NASDAQ:LGIH) delivered a -33.91% return in the past 3 months.

In October 2021, we published an article that includes LGI Homes, Inc. (NASDAQ:LGIH) in another article. You can find other investor letters from hedge funds and prominent investors on our hedge fund investor letters 2022 Q1 page.

Disclosure: None. This article is originally published at Insider Monkey.