LGI Homes’s stock price has taken a beating over the past six months, shedding 20% of its value and falling to $92.04 per share. This might have investors contemplating their next move.

Is now the time to buy LGI Homes, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.

Even with the cheaper entry price, we don't have much confidence in LGI Homes. Here are three reasons why LGIH doesn't excite us and a stock we'd rather own.

Why Do We Think LGI Homes Will Underperform?

Based in Texas, LGI Homes (NASDAQ: LGIH) is a homebuilding company specializing in constructing affordable, entry-level single-family homes in desirable communities across the United States.

1. Backlog Declines as Orders Drop

In addition to reported revenue, backlog is a useful data point for analyzing Home Builders companies. This metric shows the value of outstanding orders that have not yet been executed or delivered, giving visibility into LGI Homes’s future revenue streams.

LGI Homes’s backlog came in at $566.8 million in the latest quarter, and it averaged 4.9% year-on-year declines over the last two years. This performance was underwhelming and shows the company is not winning new orders. It also suggests there may be increasing competition or market saturation.

2. New Investments Fail to Bear Fruit as ROIC Declines

ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

We typically prefer to invest in companies with high returns because it means they have viable business models, but the trend in a company’s ROIC is often what surprises the market and moves the stock price. Over the last few years, LGI Homes’s ROIC has decreased significantly. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

3. Short Cash Runway Exposes Shareholders to Potential Dilution

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

LGI Homes burned through $237 million of cash over the last year, and its $1.55 billion of debt exceeds the $60.9 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.

Unless the LGI Homes’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.

We remain cautious of LGI Homes until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.

Final Judgment

We see the value of companies helping their customers, but in the case of LGI Homes, we’re out. Following the recent decline, the stock trades at 8.4× forward price-to-earnings (or $92.04 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are superior stocks to buy right now. We’d suggest looking at the Amazon and PayPal of Latin America.

Stocks We Would Buy Instead of LGI Homes

The Trump trade may have passed, but rates are still dropping and inflation is still cooling. Opportunities are ripe for those ready to act - and we’re here to help you pick them.

Get started by checking out our Top 6 Stocks for this week. This is a curated list of our High Quality stocks that have generated a market-beating return of 175% over the last five years.

Stocks that made our list in 2019 include now familiar names such as Nvidia (+2,183% between December 2019 and December 2024) as well as under-the-radar businesses like Comfort Systems (+751% five-year return). Find your next big winner with StockStory today for free.