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  • Writer's pictureZaw Oo

Trade Idea and Stock Analysis; Homebuilders and LGI Home Inc (LGIH)




Overview


  • The Homebuilder sector has rallied beyond rationality solely based on the expectation of the Fed cutting Rates.

  • The majority of these homebuilder companies have poor earnings and growth expectations.

  • The monthly home supply is near the 2008 pre-housing crisis level. High level of inventory with deteriorating demand.

  • Fed is now considering a 50bps hike for March 2023, which will threaten rate-sensitive sectors such as the Homebuilder

  • Even if there is no recession, the retracement of the homebuilder stocks is still highly likely.



The "rally" in the Homebuilders


The homebuilder sector has rallied 37% from Oct 2022 bottom.

Homebuilder Sector ETF: XHB


This rally was mainly on the back of declining 30Y mortgage rates along with the 10 Year Yield since Oct 2022.

10YY vs 30Y Mortgage


With the flurry of recent economic data pointing towards sticky inflation, some of the Fed officials are considering a 50bps hike for March 2023 FOMC. The result of this is the 10 Year Yield spiked up along with the 30 Year Mortgage rate last week.




While one could argue both Mester and Bullard are not voting members for 2023, it does not matter because the bond market has responded by sending the 10 Year Yield higher.


In the meantime, the monthly home supply in the US has risen to almost pre-housing crisis level, indicating a huge build-up in inventories.



LGI Home Inc (LGIH)


LGIH has rallied 69% (naise) from Oct 2022's bottom.


Looking at the previous earnings for 3Q2022, the results were abysmal.

Source: Tradingview

https://investor.lgihomes.com/news-releases/news-release-details/lgi-homes-reports-third-quarter-2022-results-and-updates-full


Home closing which is a key performance indicator (KPI) for homebuilders has declined by a whopping 38%. The average Sales Price Per Home increased by 17.6% but this is mainly due to pricing power to fight rising material costs which also leads to a small increased gross margin. Both of these are not sustainable if demands continue to deteriorate which is evident in the 27% decline in revenue.


The rally on LGIH wasn't based on anything material but rather a hope of a rate cut.

Behind the scene, earning growth estimates are declining rapidly on both sector and stock levels.



2023 earnings growth is estimated to decline by 36%

Source: SeekingAlpha


Revenue to decline by 3% for 2023

Source: Seekingalpha



As inflation continues to remain sticky, we expect more hawkish statements and action from the Fed. The 10YY and 30Y mortgage rate should continue to climb. This should act as a catalyst for the stock prices of LGIH to head back down.


Note that 4Q2022 earnings will be out today (21 Feb 2023) pre-market. We are expecting a downside reaction from the market to this earning report.


Technicals


The stock is currently facing resistance at the 120.00-125.00 level. Even if the price were to head back to the previous support level at 90.00, we are looking at a 20% downside. If the price were to retest Oct 2022's low, this is about 34% downside.


Price action momentum is now also showing some sign of reversal to the downside.


We are looking at a potential target of 90.00 to 95.00 with a timeframe of 8 weeks.

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Disclaimer: This post is intended for educational purposes. It is not to be taken as investment advice, a personal recommendation, or a solicitation to buy or sell. Nimbus Capital Solution may or may not take trades based on the idea shared. We employed a hedge fund-liked long/short portfolio strategy which focuses on our portfolio as a holistic trading vehicle rather than on individual stock/trade. We also employ bespoke portfolio management and risk management strategies to reduce our overall risk. Your capital could be at risk should you copy our trade idea blindly. Nimbus Capital Solution takes no responsibility for losses incurred by blind copy traders. #Tradeidea #Homebuilders #KGIH #Macro

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