At US$132, Is It Time To Put LGI Homes, Inc. (NASDAQ:LGIH) On Your Watch List?

LGI Homes, Inc. (NASDAQ:LGIH), might not be a large cap stock, but it received a lot of attention from a substantial price increase on the NASDAQGS over the last few months. As a mid-cap stock with high coverage by analysts, you could assume any recent changes in the company’s outlook is already priced into the stock. However, could the stock still be trading at a relatively cheap price? Today I will analyse the most recent data on LGI Homes’s outlook and valuation to see if the opportunity still exists.

See our latest analysis for LGI Homes

What Is LGI Homes Worth?

According to my price multiple model, which makes a comparison between the company's price-to-earnings ratio and the industry average, the stock price seems to be justfied. In this instance, I’ve used the price-to-earnings (PE) ratio given that there is not enough information to reliably forecast the stock’s cash flows. I find that LGI Homes’s ratio of 11.32x is trading slightly above its industry peers’ ratio of 7.64x, which means if you buy LGI Homes today, you’d be paying a relatively reasonable price for it. And if you believe that LGI Homes should be trading at this level in the long run, then there should only be a fairly immaterial downside vs other industry peers. Although, there may be an opportunity to buy in the future. This is because LGI Homes’s beta (a measure of share price volatility) is high, meaning its price movements will be exaggerated relative to the rest of the market. If the market is bearish, the company’s shares will likely fall by more than the rest of the market, providing a prime buying opportunity.

Can we expect growth from LGI Homes?

Investors looking for growth in their portfolio may want to consider the prospects of a company before buying its shares. Although value investors would argue that it’s the intrinsic value relative to the price that matter the most, a more compelling investment thesis would be high growth potential at a cheap price. Though in the case of LGI Homes, it is expected to deliver a highly negative earnings growth in the upcoming, which doesn’t help build up its investment thesis. It appears that risk of future uncertainty is high, at least in the near term.

What This Means For You

Are you a shareholder? LGIH seems priced close to industry peers right now, but given the uncertainty from negative returns in the future, this could be the right time to de-risk your portfolio. Is your current exposure to the stock optimal for your total portfolio? And is the opportunity cost of holding a negative-outlook stock too high? Before you make a decision on LGIH, take a look at whether its fundamentals have changed.

Are you a potential investor? If you’ve been keeping an eye on LGIH for a while, now may not be the most optimal time to buy, given it is trading around industry price multiples. This means there’s less benefit from mispricing. Furthermore, the negative growth outlook increases the risk of holding the stock. However, there are also other important factors we haven’t considered today, which can help gel your views on LGIH should the price fluctuate below the industry PE ratio.

So while earnings quality is important, it's equally important to consider the risks facing LGI Homes at this point in time. Every company has risks, and we've spotted 1 warning sign for LGI Homes you should know about.

If you are no longer interested in LGI Homes, you can use our free platform to see our list of over 50 other stocks with a high growth potential.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.