Be sure to read all the way to the end for this week’s A+ Investor Challenge.
Two weeks ago, I posed a “challenge” to A+ Investor subscribers to use the Stock Grades Screener to identify a stock with a high Value Grade and then analyze it to rate its prospects.
One submission we received was from Jim from Longboat Key, Florida. An engineer by trade, Jim provided us with a thoughtful analysis of D.R. Horton Inc. (DHI) and gave us permission to share it with all of you (what we provide below is edited for length and clarity). [Full disclosure: D.R. Horton is held in the Stock Superstars Report portfolio.]
D.R. Horton is a homebuilding company operating in 90 markets in 29 states across the U.S. It also offers financial services to homebuyers. D.R. Horton has subsidiaries that conduct insurance-related operations; construct and own income-producing rental properties; own non-residential real estate, including ranch land and improvements; and own and operate oil and gas-related assets.
Jim emailed us on March 20, and D.R. Horton shares had closed the previous day at $30.01. At the time, the stock had a Value Grade of B. As Jim said in his email, “DHI is a large-cap, dividend-paying company that meets my primary ownership criteria.”
Using D.R. Horton’s 2020 expected earnings per share (EPS) of $5.20 and trailing price-earnings (P/E) ratio of 6.6 (as of the close on March 19), Jim came up with a simple price target of $34.32 (EPS × P/E), which translated into a potential return of 14.4%.
As a value investor, Jim uses a variety of valuation multiples, including the price-to-sales, price-earnings-to-growth (PEG), price-to-book-value and price-to-cash-flow ratios. He compares them against industry benchmarks to see whether a stock is attractive relative to its peers (the A+ Stock Grades are derived from percentile rank data that compares a company’s value against the entire universe of U.S.-listed stocks).
The data Jim used for his analysis highlights one issue when performing industry and sector analysis—the designations being used. The sector data Jim provided showed D.R. Horton as having valuation multiples that were much lower than their industry. We don’t know the source of Jim’s data, but it didn’t match what we were seeing with our own data from Refinitiv, which is also used to create the A+ Stock Grades. That being said, the percentile rank data used for the Value Grade put D.R. Horton in the B range. Here are D.R. Horton’s valuation rankings as of the close on March 19 (actual value in parentheses):
As Jim mentioned in the beginning of his analysis, he looks for dividend-paying stocks. He likes the downside protection D.R. Horton’s 2.3% dividend yield offers, which was based on the company’s $0.70 per share indicated annual dividend. Jim was also impressed by D.R. Horton’s recent track record of raising its dividend. After cutting its dividend in 2008 and 2009, D.R. Horton went four years without raising it (although it continued to pay a dividend). Since 2015, the company has raised its dividend by an average of 25.7% through last year. Last November, the company announced a 16.7% dividend increase.
Jim also pointed out that the company has posted positive earnings surprises for the last five quarters and has not had a negative earnings surprise in at least the last 13 quarters. On January 27, the company reported a 26.6% positive earnings surprise on earnings of $1.16 per share.
Lastly, Jim noted that the attractive valuations for D.R. Horton have been driven by the overall market decline due to the coronavirus pandemic. Through the four trading weeks ended March 19, D.R. Horton shares had fallen nearly 52% (shares did rebound 22.9% between the close on Thursday, March 19, and Friday, March 27). However, Jim feels that the recent interest rate cuts will make homebuying more attractive. The wild card, he pointed out, is the long-term impact the coronavirus pandemic will have on jobs and spending.
Thank you very much, Jim, for offering your analysis insights. A+ subscribers: If you didn’t have a chance to submit your stock analysis, you can still email it to us at aplus@aaii.com.
For our next challenge, using the Screen Power Rankings, identify a stock screening strategy that suits your investment style and then highlight a stock passing that screen that interests you. Please email your comments to aplus@aaii.com, and I will highlight a couple of submissions in two weeks.
