This Less-Followed Home Builder Could Be Setting Up For a Rally

One of the biggest beneficiaries of the changing economy has been the housing industry. The health crisis has caused consumers to reevaluate their living conditions and new and existing home sales have been trending higher over the last few quarters. Homebuilding stocks have rallied sharply over the last eight months and the SPDR S&P Homebuilders ETF (XHB) has more than doubled. The fund fell below the $25 level in March and is now trading over $55.

LGI Homes (LGIH) took part in the rally, rallying almost an exact $100 from its low of $33 to a high of $132.98. The stock has pulled back over the last few months, but may be setting up for another leg higher. The stock pulled back briefly in the third quarter and hit a low of $101.30 before rallying to its all-time high. The recent pullback has brought the $101-$102 range back in to play. The recent pullback has also brought the weekly stochastic readings down close to oversold territory for the first time since March.

Prior to the oversold readings in March, the indicators were below 30 in the fourth quarter of 2019 and in Q4 2018. In both of those instances the stock rallied off their lows.

LGI Homes isn’t as widely followed as competitors like Lennar (LEN) and D.R. Horton (DHI), and it also doesn’t have as much optimism toward it. From a contrarian perspective, this is a good thing for LGI as it leaves room for the bearish sentiment to shift to bullish and help push the stock higher.

LGI only has five analysts covering it with one “buy” rating, three “hold” ratings, and one “sell” rating. Not only is the overall coverage low, but the buy percentage is only 20%. On the other hand D.R. Horton has 22 analysts covering it with 16 “buy” ratings and six “hold” ratings. That’s a buy percentage of 72.7%. Lennar also has 22 analysts covering it with 13 “buy” ratings and nine “hold” ratings. That means its buy percentage is 59.1%.

Short sellers are also displaying pessimism toward LGI. The short interest ratio is at 8.5 currently and that is well above the average ratio in the 3.0 range. Lennar’s short interest ratio is 3.1 and D.R. Horton’s is below average at 1.5.

If we look at the Tickeron Screener for these three stocks, LGI has one positive indicator from the Profit vs. Risk Rating and it has one negative from the PE Growth Rating. D.R. Horton has two positive readings and two negative readings while Lennar has one positive and one negative. Both Lennar and D.R. Horton get negative readings for the Outlook Rating.