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LGI Homes (NASDAQ:LGIH) earnings and shareholder returns have been trending downwards for the last year, but the stock lifts 5.3% this past week


Passive investing in an index fund is a good way to ensure your own returns roughly match the overall market. But if you buy individual stocks, you can do both better or worse than that. Unfortunately the LGI Homes, Inc. (NASDAQ:LGIH) share price slid 34% over twelve months. That contrasts poorly with the market decline of 20%. On the bright side, the stock is actually up 25% in the last three years.

On a more encouraging note the company has added US$112m to its market cap in just the last 7 days, so let’s see if we can determine what’s driven the one-year loss for shareholders.

View our latest analysis for LGI Homes

There is no denying that markets are sometimes efficient, but prices do not always reflect underlying business performance. One way to examine how market sentiment has changed over time is to look at the interaction between a company’s share price and its earnings per share (EPS).

Unfortunately LGI Homes reported an EPS drop of 6.9% for the last year. The share price decline of 34% is actually more than the EPS drop. Unsurprisingly, given the lack of EPS growth, the market seems to be more cautious about the stock. The P/E ratio of 5.48 also points to the negative market sentiment.

The image below shows how EPS has tracked over time (if you click on the image you can see greater detail).

NasdaqGS:LGIH Earnings Per Share Growth January 4th 2023

We consider it positive that insiders have made significant purchases in the last year. Having said that, most people consider earnings and revenue growth trends to be a more meaningful guide to the business. Dive deeper into the earnings by checking this interactive graph of LGI Homes’ earnings, revenue and cash flow.

A Different Perspective

We regret to report that LGI Homes shareholders are down 34% for the year. Unfortunately, that’s worse than the broader market decline of 20%. Having said that, it’s inevitable that some stocks will be oversold in a falling market. The key is to keep your eyes on the fundamental developments. Longer term investors wouldn’t be so upset, since they would have made 5%, each year, over five years. It could be that the recent sell-off is an opportunity, so it may be worth checking the fundamental data for signs of a long term growth trend. I find it very interesting to look at share price over the long term as a proxy for business performance. But to truly gain insight, we need to consider other information, too. Take risks, for example – LGI Homes has 4 warning signs (and 3 which are concerning) we think you should know about.

LGI Homes is not the only stock that insiders are buying. For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on US exchanges.

What are the risks and opportunities for LGI Homes?

LGI Homes, Inc. designs, constructs, and sells homes.

View Full Analysis

Rewards

  • Price-To-Earnings ratio (5.5x) is below the US market (14.3x)

Risks

  • Earnings are forecast to decline by an average of 16.3% per year for the next 3 years

  • Debt is not well covered by operating cash flow

  • High level of non-cash earnings

  • Significant insider selling over the past 3 months

View all Risks and Rewards

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.



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