Please ensure Javascript is enabled for purposes of website accessibility

Why Gap, Texas Roadhouse, LGI Homes, and Meritage Homes All Rallied More Than 10% in April

By Reuben Gregg Brewer - May 5, 2021 at 3:33PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

This quartet spans three industries, but all four stocks have benefited from the reopening trade. Here's a quick look at what's going on.

What happened

Shares of homebuilder LGI Homes (LGIH -0.61%) rose 11% in April, according to data from S&P Global Market Intelligence. Peer Meritage Homes (MTH -0.79%) advanced an even more impressive 15.5% or so. Meanwhile shares of retailer Gap (GPS 1.18%) increased in value by 11%, and restaurateur Texas Roadhouse (TXRH 0.76%) jumped by 11.5%. 

At first blush there are very big differences among these companies, which is clearly the case. However, there's also something important connecting them all -- the coronavirus pandemic. Or, more to the point in April, the ongoing recovery from this frightening health scare.

A man in a suit shooting hundred dollar bills off of a pile in his hand

Image source: Getty Images.

So what

LGI Homes is largely focused on starter houses, offering convenient ways for first-time homebuyers to achieve the so-called American Dream. As people have moved out of more congested regions, like big cities, they have been looking to put down roots with a home purchase. And that's been a huge benefit to LGI Homes' business. In fact, in early April, it announced that March had been a record-breaking month on the sales front, capping an incredibly strong first quarter. To put some numbers on that, March saw a 44% year-over-year increase in sales, with the first quarter coming in at a not-too-shabby 40%. Not surprisingly, LGI Homes reported impressive first-quarter sales and earnings when it reported in early May and a material backlog of homes to be built. In April investors were simply rewarding the company for the success it is having.  

Meritage Homes is basically benefiting from the same broad trends, though it tends to focus on a different level of homebuyer. Still, the industry upturn was on clear display when the homebuilder reported earnings in late April. The company closed on 25% more homes, year over year, in the first quarter of 2021, leading to a 21% increase in home closing revenue. It also saw a 32% increase in revenue from its financial services business. Earnings per share, meanwhile, rose an incredible 88%. And, like LGI Homes, Meritage has a material backlog of work still to be done, with a 47% increase in the number of homes it has to complete. Once again, investors were simply rewarding the company for its success, as it has continued to benefit as the economy reopens.   

To be fair, the trends in the homebuilding space have been in place for some time, with Meritage's executive chairman, Steven Hilton, noting that 2021 was "off to a solid start with robust demand that never really slowed down from an exceptional 2020." That wasn't exactly the case for Gap or Texas Roadhouse, which both had to suffer through the social distancing and economic shutdowns of nonessential businesses that took place last year. However, the vaccine rollout has changed things in a big way.  

While Gap didn't report any material news in the month of April, it was very clear that consumers were going back out to shop as the new year got underway. David Simon, CEO of giant landlord Simon Property Group, highlighted that he was seeing "green shoots" during his company's fourth-quarter 2020 earnings conference call, as people started to venture out more. Peer Tanger Factory Outlet Centers was even more precise, saying that customer traffic was basically back to normal in January.  

LGIH Chart

LGIH data by YCharts

Those updates happened earlier in the year, but things have only gotten better on the coronavirus front since that point for most retailers. And investors are starting to put more money to work in companies that will benefit. Gap, one of the larger clothing retailers, is an obvious choice as malls and other retail locations start to see more and more customers.

Texas Roadhouse, meanwhile, is basically benefiting from the same general theme, only on the food front. That said, the restaurant company reported earnings in late April and the news was almost shockingly good. Revenue was up nearly 23% year over year in the first quarter of 2021 compared to 2020. It was also up 19% compared to 2019, leading CEO Jerry Morgan to comment, "A year ago today, all of our dining rooms were still closed and while we knew brighter days were ahead, we never could have anticipated where we are today. Our operating results have exceeded even pre-pandemic levels." Earnings were higher by nearly 300% year over year and up about 30% compared to the first quarter of 2019. It is possible that Texas Roadhouse is getting a bump from pent-up demand, but it is still easy to see why investors were bullish on the stock in April.  

Now what

Long-term investors need to step back and put both 2020 and 2021 into a broader context. Neither year could be classified as business as usual, with one artificially depressed and the other representing a snap back from the pandemic headwinds. And there are major trends here, like in housing, retailing, and eating, that have to work themselves out. Yes, LGI Homes, Meritage Homes, Gap, and Texas Roadhouse are all experiencing robust demand right now, and investors are excited by that. However, it would be a mistake to focus so much on the early success in 2021 that you don't pay enough attention to longer-term company and industry trends.

Reuben Gregg Brewer owns shares of Simon Property Group. The Motley Fool owns shares of and recommends LGI Homes and Texas Roadhouse. The Motley Fool recommends Meritage Homes and Tanger Factory Outlet Centers. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

The Gap, Inc. Stock Quote
The Gap, Inc.
$10.77 (1.18%) $0.12
Texas Roadhouse, Inc. Stock Quote
Texas Roadhouse, Inc.
$94.80 (0.76%) $0.71
Meritage Homes Corporation Stock Quote
Meritage Homes Corporation
$88.47 (-0.79%) $0.70
LGI Homes, Inc. Stock Quote
LGI Homes, Inc.
$111.58 (-0.61%) $0.69

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/15/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.