Is Homebuilder Lennar (LEN) A Buy After it Reaches An All Time High?
With new cases of the coronavirus spiking in the US and worldwide.
With the already historic unemployment levels and job losses in recent months.
And with many Blue-Chip stocks looking vulnerable when they’re supposed to be among the best areas to invest your capital.
There are few safe places to invest your today. And this number grows smaller every day this crisis lasts.
The key to continue compounding your investments and build wealth is to keep investing well over time.
Most people think the number one way to do that is to invest in assets that will grow your capital.
And this is a huge part of things.
But another huge part of this is also losing as little capital as possible.
The fewer investment losses you have the more capital you keep. And the more capital you keep the faster you can invest well to grow your wealth.
In recent articles I’ve shown you several stocks to avoid investing in.
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Today, I want to answer… Is Homebuilder Lennar (LEN) A Buy After it Reaches An All Time High?
Lennar Corp (LEN) is the United States largest single family home builder by revenue.
Its based in Miami Florida. It has a $23.2 billion market cap. And it pays a 1.4% dividend… Which is reason #1 to consider buying its stock.
Lennar’s 1.4% Dividend
Over the last decade Lennar’s paid out a total of $1.60 per share in dividends.
At today’s share count of 311 million shares that’s equal to $497.6 million paid out to shareholders in that time.
The more important thing here…
Even toward the tail end of The Great Recession in 2010 and 2012 while homebuilders were crushed… Lennar kept its dividend.
These dividend payments will help you in normal times earn cash if you take the money out. Or allow you to buy more shares over time if you reinvest the dividends.
It can do this because it earns solid profits. Which is reason #2 to buy Lennar to Depression Proof Your Portfolio.
Lennar Earns Good Profits
Over the last decade it earned an average operating income margin of 9.3% per year.
I look for anything above 10%.
Another way to show this is with its free cash flow to sales ratio (FCF/Sales). Over the last decade its negative 1.5% per year on average.
I call this the “Cash Machine” metric.
I look for anything above 5% on a consistent basis for the same reasons as I look for high operating profit margins above. If a company surpasses both thresholds it makes it a great operating business that is safe and valuable.
And News Corp surpasses one while missing the mark on the other…
But the free cash flow also isn’t the full story.
Even though on average over the last decade its negative… All the negative years were between 2011 and 2015 as it worked to recover from the housing bust during The Great Recession.
Since then, its average FCF/Sales margin from 2016 to today near the end of 2020 is 8.5% per year.
These decent profits also allow Lennar to have reasonable debt which is reason #3 to buy its stock.
Lennar Has Reasonable Debt
As of this writing Lennar has $2.3 billion in cash compared to $8.14 billion in debt.
As a percentage of its balance sheet, total liabilities make up 41.2%.
Its debt makes up only 35.1% of its current market cap.
And its debt-to-equity ratio is 0.47.
These are all well below what I look for when considering an investment… Which means its low levels of debt add a margin of safety to potentially investing in Lennar stock.
It appears Lennar learned its lessons from the housing bust… What got it into some trouble then were large amounts of debt. And its now got those under control.
So far Lennar looks like a good potential investment… But what about its valuation? Is it cheap?
Lennar IS Cheap
With the markets at or near all-time highs you’d expect a good stock like Lennar to be selling at an enormous valuation.
But its not…
As of this writing its P/E is 9.5.
Its P/CF is 5.6.
Its forward P/E is 9.1.
And its enterprise value to operating income – EV/EBIT is 8.3.
On all three metrics at the top, I look to buy investments below 20 to consider them undervalued.
And on EV/EBIT I look to buy stocks below 8.
This means, Lennar is undervalued by a decent amount now.
And this means owning its stock gives you a margin of safety in investing terminology.
When you invest in stocks that have a margin of safety it makes the investment safer. And it also means you should expect to earn higher returns owning it in the coming years.
The inverse of this is also true…
When you invest in a stock without a margin of safety it makes the investment riskier. And it also means you should expect to earn less owning its stock going forward.
With Lennar being undervalued it makes the investment riskier. Even with the other things above.
One Area Of Concern…
If you’re now thinking about buying Lennar stock to depression proof your portfolio, I have one more word of caution.
Yes, Lennar looks like a great investment now on all metrics and numbers… And yes, it cleaned up the debt that got it into some problems during The Great Recession.
But with coronavirus cases still exploding in the US leading to more lockdowns, job losses, and business closures it could lead to problems in housing.
If people can’t afford their mortgages – or to buy new houses in this case from Lennar – it would harm the entire housing industry… Including Lennar.
At this point in the pandemic that hasn’t happened yet. And the housing market is still in great shape.
But if you’re still thinking about buying Lennar stock this is something you need to be comfortable with.
If you’re looking for a solid, safe, stable, and enormously profitable investment to buy to Depression Proof Your Portfolio – consider investing in Lennar… If you’re comfortable with the potential risk of a downturn in housing.
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Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.