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Would You Consider Investing in LGI Homes (LGIH)?

·4 min read

1 Main Capital, an investment management firm, published its first quarter 2021 investor letter – a copy of which can be downloaded here. A net return of 18.3% was delivered by the fund for the Q1 of 2021, ahead of its S&P 500 and Russell 2000 benchmark that delivered a 6.2% and 12.7% return respectively in the same period. You can view the fund’s top 5 holdings to have a peek at their top bets for 2021.

1 Main Capital, in their Q1 2021 investor letter, mentioned LGI Homes, Inc. (NASDAQ: LGIH) and shared their insights on the company. LGI Homes, Inc. is a Texas-based construction company that currently has a $4.1 billion market capitalization. Since the beginning of the year, LGIH delivered a 57.86% return, extending its 12-month gains to 201.44%. As of April 26, 2021, the stock closed at $167.09 per share.

Here is what 1 Main Capital has to say about LGI Homes, Inc. in their Q1 2021 investor letter:

"The Fund has several positions that capitalize on this theme. Our two favorites (includes) LGI Homes (LGIH). The simplest way to explain these two holdings are that people will buy more houses in the next five years than they did in the prior five and these new houses will need to be furnished.

LGI Homes (LGIH) is an owner-operated entry-level home builder that has a highly differentiated strategy compared to many of its public peers. Since its 2013 IPO, LGIH has grown substantially by expanding its operations from 9 markets in 4 states to 34 markets in 18 states, while maintaining a clean balance sheet and industry leading ROEs (its trailing 5-year average ROE is 27%).

The company focuses on developing and building in affordable locations that are typically further away from urban centers than those pursued by competition. Additionally, LGIH has a highly focused sales strategy. It has a 100-day training program for its sales team member and keeps its sales centers well-staffed for 362 days per year.

As such, while typical homebuilders rely primarily on realtors to bring in buyers, LGIH sells mostly direct-to-consumer which leads to higher margins. On top of that, LGIH’s units have nice finishes but very minimal customization, which allows the company to sell homes 30-90 days out, driving faster inventory turnover than peers.

In 2020, LGIH generated revenues of $2 billion, well below its largest public peers Lennar and D.R. Horton, which each reported revenue of more than $20 billion. Over time, LGIH hopes to become a top 5 builder, which would probably mean $10 billion + of annual revenues.

Given its high ROEs, LGIH can likely internally fund significant organic growth for the next 5+ years, while also opportunistically pursuing buybacks or M&A when market conditions warrant. The Fund acquired its position in LGIH at a single digit multiple of trailing GAAP net income, which is an attractive level for a high-quality business with a strong management team and attractive growth profile."

Real Estate and Brokers
Real Estate and Brokers

Our calculations show that LGI Homes, Inc. (NASDAQ: LGIH) does not belong in our list of the 30 Most Popular Stocks Among Hedge Funds. As of the end of the fourth quarter of 2020, LGI Homes, Inc. was in 23 hedge fund portfolios, compared to 25 funds in the third quarter. LGIH delivered a 49.23% return in the past 3 months.

The top 10 stocks among hedge funds returned 231.2% between 2015 and 2020, and outperformed the S&P 500 Index ETFs by more than 126 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds’ poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Here you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost real estate prices. So, we recommended this real estate stock to our monthly premium newsletter subscribers. We go through lists like the 15 best innovative stocks to buy to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our website:

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