What Does LGI Homes, Inc.'s (NASDAQ:LGIH) Share Price Indicate?

LGI Homes, Inc. (NASDAQ:LGIH), is not the largest company out there, but it saw a decent share price growth in the teens level on the NASDAQGS over the last few months. With many analysts covering the mid-cap stock, we may expect any price-sensitive announcements have already been factored into the stock’s share price. However, what if the stock is still a bargain? Let’s examine LGI Homes’s valuation and outlook in more detail to determine if there’s still a bargain opportunity.

View our latest analysis for LGI Homes

Is LGI Homes Still Cheap?

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. I’ve used the price-to-earnings ratio in this instance because there’s not enough visibility to forecast its cash flows. The stock’s ratio of 7.39x is currently trading slightly below its industry peers’ ratio of 7.4x, which means if you buy LGI Homes today, you’d be paying a reasonable price for it. And if you believe LGI Homes should be trading in this range, then there isn’t much room for the share price to grow beyond the levels of other industry peers over the long-term. 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.

What does the future of LGI Homes look like?

Future outlook is an important aspect when you’re looking at buying a stock, especially if you are an investor looking for growth in your portfolio. 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. However, with an extremely negative double-digit change in profit expected over the next couple of years, near-term growth is certainly not a driver of a buy decision. It seems like high uncertainty is on the cards for LGI Homes, at least in the near future.

What This Means For You

Are you a shareholder? Currently, LGIH appears to be trading around industry price multiples, but given the uncertainty from negative returns in the future, this could be the right time to reduce the risk in 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 crystallize 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. For example, LGI Homes has 4 warning signs (and 3 which are a bit unpleasant) we think 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.