Published four times a year, in each issue of Hidden Value Stocks we speak with at least two hedge funds, who profile two small-cap ideas each. These ideas have to be small-cap companies, and also uncovered by the rest of the market. We are looking for true hidden value.
In the December issue, we profile Joe Frankenfield, the founder, and co-portfolio manager of Saga Partners. He is focused on finding high-quality, undiscovered or misunderstood compounder companies with a durable competitive advantage.
One of the two companies Joe profiles is LGI Homes, a small-cap he believes is massively understood by the market. Here's a small snippet of his investment thesis:
"LGI is a fairly capital-intensive, high growth company which has to reinvest profits to grow. If the company were to stop increasing unit volume, all profits would be able to be distributed to shareholders. If LGI stopped growing and maintained its current capacity of 6,000 to 7,000 homes per annum, it would have about $155 million in distributable profits this year or a 17% earnings yield.
Since a lot of LGI’s capital is tied up in its housing inventory, it’s reasonable to use book value as a proxy for value. LGI is currently trading at 1.6x book value. If the company continues to earn 30% on equity and an investor bought shares at 1.6x book value, they would be earning nearly 20% on their investment at current prices. LGI has been able to grow book value per share at over 35% a year since going public, and while growth is likely to slow as LGI becomes a larger company the current valuation looks highly attractive."
To discover the rest of the interview and the profile of LGI, sign up to Hidden Value Stocks today. When you subscribe you will receive four issues a year, containing a total of 16 small-cap ideas as well as exclusive access to the fund managers profiled and regular updates.
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