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The New Home Company - Small-cap homebuilder with attractive valuation

6/30/2015

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NWHM was founded in August 2009 by Larry Webb, Wayne Stelmar, Joseph Davis and Tom Redwitz who still hold a combined 20% of the company. Each of them has at least 25 years of real estate experience, and some of them have worked together in John Laing Homes, which they took private in a management buyout and later sold in 2006. New Home Company operates in California, mainly in SF bay and around Sacramento. As of December 2014, they owned 22 communities and 54 communities with their join ventures.

According to management, after real estate prices collapsed in 2008, they formed the company and bought several blocks of land for attractive prices. NWHM develops and owns some properties (37% of revenues), and also builds real estate for 3rd parties (63%). However, first segment is more lucrative with 15% gross margins, compared to 4-5% fees they collect in second one.

Basically, it is a home builder located in California, building and acquiring mainly communities, either on it's own or through joint ventures. Let's look at financials. 
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It is apparent that NWHM is growing it's top line quite fast, and this will accelerate in 2015 as they aim for $400 million in revenues. The company is expected to report a full year EPS of 1.35-1.45, giving it a forward P/E of around 12, and forward P/S of 0,7. For 2016, the situation looks again quite similar, where NWHM guided growth of revenue and EPS at 60% and 70% respectively. As of 31st of March, the stock had 50 million in cash, and 125 million in long-term liabilities. Company backlog grew around 5 times to $82 million in last quarter YoY, while backlog of joint ventures doubled in the same period. They seem to be executing their strategy well, and should be able to reach this year's targets easily.

US Housing market

Housing market is the cornerstone of every major economy. It's recovery has led US out of most major recessions, but this time it's really sluggish. New home sales are at levels seen during recessions in 1970s and 1980s, and house prices in certain cities still hover around 2012 lows, even though the average is steadily climbing up. Most home builders have lagged S&P500 performance in last 2 years (exception is Lennar, LEN), even though the housing market has quite improved. As a result, the whole group trades for low valuation multiples, with impressive growth rates. Situations like this offer great risk / reward ratios, and as such are very attractive investments. NWHM is the fastest growing public-listed home builder, with a great management (they made fun of each other on last conference call, too bad JP Morgan analyst didn't get the jokes), and a lot of potential. Bought the stock already with stop loss as usual. Good luck in investing!

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US New Home Sales
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House prices in US
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Luxoft (LXFT) - Undervalued midcap in IT outsourcing sector

6/16/2015

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Luxoft offers specialized software development to multinational companies in 6 main sectors: Financials, Automotive, Technology, Telecom, Travel and Energy. Around 65% of revenues come from the financials, mainly from contracts with Deutsche Bank and UBS. Most of workforce comes from Ukraine, Poland, Russia, Bulgaria (advanced projects) and Vietnam (less advanced). Customers are mostly from US, UK and Germany, with companies like Ford, Boeing, and IBM using their services. 

According to Luxoft, wage costs for qualified programmers are 75% lower in CEE (Central and Eastern Europe), than in the West. Wage inflation is around 6% in Russia and Ukraine, but they still have a huge cost advantage for many years to come. LXFT basically offers higher quality work than developers from India or Bangladesh, for a fraction of the cost in US or EU. Let's look at financials:
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Luxoft has grown steadily over the past few years, gross and operating margins are recovering after a dip from 2011. Net margin was down in 2015 due to a $8 million loss on currencies (which is strange, considering their revenues are in EU and USD, while costs in currencies like Polish Zloty and Russian Ruble) and a higher tax rate. They have a special tax treatment in Russia (until 2017) and recently moved to Switzerland so tax rate shouldn't increase in the near future.

Valuation
I used a three stage DCF model with these assumptions:

- profit growth of 20% for next 5 years, 10% for years 6-10, 2% thereafter
- discount rates of 6,7,8%
- 13% net profit margin
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You can see that LXFT offers at least 30% potential from current prices, given assumptions above. I think it is trading so cheap because of the situation in Ukraine and Western sanctions against Russia. Another thing is that the company derives most of it's revenues from financial sector, which is currently not "popular", but much better capitalized and with a brighter future than in 2007. Be greedy when others are fearful, and be fearful when others are greedy. I am going long LXFT stock today with a stop loss like usual.
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A successful strategy for buying momentum stocks

6/6/2015

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Financial pundits, news commentators, and various bloggers describe momentum investing as buying the best stocks of last 3, 6 or 12 months and holding them in hope the price advance will continue in the future. They view it as a blind strategy, where hordes of people buy a stock simply because it went up in previous period.  In their words, momentum stocks are very volatile and risky with high P/E ratios, and market participants involved in them are fools. This is a completely wrong perception. Anybody who thinks they can just buy last year's winners without any analysis and make money should visit a doctor. 

Momentum effect has been well documented by the academic community as well as fund management companies. Father of momentum investing, Richard Driehaus has long advocated this approach, along with Gerry Tsai (man who made Fidelity into a powerhouse), Martin Zweig, Philip Fisher, William O'Neil and many others. These fund managers have become legends by buying fast growing stocks in up trends for cheap prices. Do you think they just look at past year's winners and buy them every year? Probably not, nobody is that stupid.

My strategy is to use price momentum as a primary stock screener. In other words, I look at stocks making new highs for longs, and stocks going down for shorts. After that I apply various growth and value criteria (min. 10% sales growth, low debt to equity, high ROE, low P/S ratio) to narrow it down to a few stocks. These I check more thoroughly, and determine whether they have potential and are selling for a fair price.   

When a price moves up or down, there is usually a reason for it, somebody is buying or selling the stock and I have to know why. 

Wall Street and Financial Media divide stocks into various categories like growth, value, momentum, dividend and so on. They fail to see, that there is no need for division because it's all connected. As Warren Buffet said: "Growth is merely a part of value equation". When I am buying a stock, I want it to have a competitive advantage, high growth rates, be reasonably valued, and already in uptrend, if it pays a dividend that's a bonus. If it doesn't grow fast, is overvalued or in a downtrend I simply won't buy it. 

So what am I? A "value momentum growth dividend investor"! Sounds retarded, doesn't it? In fact I am just doing what every successful and intelligent investor advocates: Buy a great company for a good price and hold it as long it's making money. Price momentum is just a part (an important one in my strategy) of the whole process, and is a valuable addition to growth and value criteria in my opinion. 

I don't look at how much a stock made in the past 6 months or year. It doesn't matter at all. If you look at the winning stocks of past 100 years, they have one thing in common: all went up in price significantly and made hundreds of new highs year by year. When I look at stocks making 52-week highs today, I know there are many tomorrow's big winners there, and you just need to do the homework to identify them. Momentum definitely works as a great indicator, and does not deserve the "overvalued hype stocks" tag on it.

Do you have questions or comments about momentum investing? Post a comment below!



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    To make money in stocks you must have the "the vision to see them, the courage to buy them and the patience to hold them". And patience is the rarest of the three.  Thomas Phelps

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