A Form 4 filed with the SEC has disclosed that Lennar Corporation (NYSE:LEN) Board member Jeffrey Sonnenfeld directly acquired over 3,300 shares of stock on June 27th at an average price of $37.41 per share. This gives him a total of over 17,000 shares of the $7 billion market cap homebuilder. Interestingly, Sonnenfeld had sold 2,500 shares in April at about $39.50 per share. Due to short-swing profit rules, he forfeited about $5,000 worth of “profit” realized from buying back these shares at a lower price than where he had recently sold them. Studies generally show that stocks bought by insiders narrowly outperform the market (read our analysis of studies on insider trading) with one common explanation being that insiders have to be somewhat confident in the company in order to buy more shares rather than diversify their wealth.
With markets having anticipated strength in the housing market, Lennar Corporation (NYSE:LEN)’s stock has risen over 90% in the last two years though it has actually fallen in price year to date. The second quarter of its fiscal year ended in May, with the company recording a 53% increase in revenue versus a year earlier. Homebuilding activities (by far the largest source of Lennar Corporation (NYSE:LEN)’s revenue) and the financial services business grew at similar rates. Cost growth was held down nicely and so pretax income more than tripled (Lennar Corporation (NYSE:LEN) had received a large tax benefit in the prior-year period). Markets currently price the company for continued high growth, at 19 times trailing earnings; many market players think that investors are being too optimistic, however, and 22% of the float is held short.
In addition to maintaining a database of insider trading activity, we follow quarterly 13F filings from hundreds of hedge funds and other notable investors. We’ve found that this information can be used to help develop investing strategies; for example, the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year (learn more about our small cap strategy). Billionaire Stanley Druckenmiller had Lennar Corporation (NYSE:LEN) as his top single-stock holding as of the end of March (find Druckenmiller’s favorite stocks).
Other homebuilding companies include D.R. Horton, Inc. (NYSE:DHI), KB Home (NYSE:KBH), PulteGroup, Inc. (NYSE:PHM), Toll Brothers Inc (NYSE:TOL). Lennar, as it happens, is square in the middle of this group in terms of its forward P/E of 14. PulteGroup and DR Horton feature slight discounts to that valuation, with forward earnings multiples in the 11-12 range.
These companies each reported significant improvements on both top and bottom lines in their most recent quarter compared to the same period in the previous fiscal year. We’d note that while their valuations look cheap in forward earnings terms, analyst projections are calling for high growth to continue here; in fact, PulteGroup is valued at over 20 times trailing earnings so it is priced at a premium to Lennar Corporation (NYSE:LEN) on that basis. We’d note that DR Horton is seeing interest from short sellers as well.
Toll Brothers trades at 22 times forward earnings estimates, with markets giving it a premium likely due to its emphasis on more upscale residential construction. Its net income grew by 46% last quarter (which ended in April) from levels a year ago, with good revenue growth as well, though those figures aren’t too different from what we have seen at its peers. It has a higher bar to justify its current valuation, and so we think that we would avoid it. Growth numbers have also been very good at KB Home, which has approximately doubled in price over the last year. It’s another popular short target, with short sellers responsible for 27% of the float. It’s actually unprofitable on a trailing basis, and so we wouldn’t be buying it right now either.
A trailing P/E of 19 doesn’t seem too bad considering Lennar’s recent performance. The insider purchase could certainly be read as generally optimistic on housing, and investors interested in the industry as a macro play may want to keep that in mind. Considering the insider’s willingness to give up even a few thousand dollars worth of profit to be able to buy now as opposed to in the few months, we think that Lennar and some of its similarly priced peers might be worth a closer look.
Disclosure: I own no shares of any stocks mentioned in this article.
