LGI Homes Passes the "Cornerstone" Growth Test

12/18/2017 5:00 am EST

Focus: STRATEGIES

John Reese

Founder and CEO, Validea.com And Validea Capital Management

John Reese, editor of Validea, assesses stocks based on the known investing criteria of many of the stock market's most legendary investors. Here, he looks at LGI Homes, Inc. (LGIH) is a homebuilder and land developer.

LGI Homes (LGIH) is engaged in the design, construction, marketing and sale of new homes in markets in Texas, Arizona, Florida, Georgia, New Mexico, the Carolinas, Colorado, Washington and Tennessee.

We have assessed the stock based on the growth and value strategy as outlined by James P. O'Shaughnessy. The money manager is best know for his 1996 bestseller, What Works on Wall Street.

He back-tested 44 years of stock market data from the comprehensive Standard & Poor's Compustat database to find out which quantitative strategies have worked over the years and which haven't.

To the surprise of many, he concluded that price/earnings ratios aren't the best indicator of a stock's value, and that small-company stocks, contrary to popular wisdom, don't as a group have an edge on large-company stocks. Below, we screen LGI Homes based on O'Shaughnessy's "Cornerstone Growth Strategy".


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MARKET CAP: PASS

The first requirement of the Cornerstone Growth Strategy is that the company has a market capitalization of at least $150 million. This will screen out the companies that are too illiquid for most investors, but still include a small growth company. LGI Homes, with a market cap of $1,518 million, passes this criterion.

EARNINGS PER SHARE PERSISTENCE: PASS

The Cornerstone Growth methodology looks for companies that show persistent earnings growth without regard to magnitude. To fulfill this requirement, a company's earnings must increase each year for a five year period. LGIH, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 0.50, 1.07, 1.33, 2.44 and 3.41, passes this test.

PRICE/SALES RATIO: PASS

The Price/Sales ratio should be below 1.5. This value criterion, coupled with the growth criterion, identify growth stocks that are still cheap to buy. LGIH's Price/Sales ratio of 1.39, based on trailing 12 month sales, passes this criterion.

RELATIVE STRENGTH: PASS

The final criterion for the Cornerstone Growth Strategy requires that the Relative Strength of the company be among the top 50 of the stocks screened using the previous criterion. This gives you the opportunity to buy the growth stocks you are searching for just as the market is embracing them. LGIH, whose relative strength is 94, is in the top 50 and would pass this last criterion.

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