Homebuilder Stock Builds Base In Challenging Rate Climate; Offers Entry

Homebuilder stock D.R. Horton (DHI) is a top stock to watch and Monday’s IBD Screen Of The Day pick. DHI stock is building a long cup base with a buy point of 110.55. The cup’s depth is deeper than ideal, at 46%, likely due to the challenging macro environment for homebuilders. And it isn’t forecast to get better in 2023, as rate hikes slow the pace of construction and sales.

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With many factors affecting stock performance, it isn’t easy knowing which ones to pick. Ideal stocks are those with strong technical ratings and fundamentals. The IBD Screen Of The Day identifies these high odds plays, based on recent price performance and comparative strength in several parameters, such as earnings and sales growth.

Strong Earnings Outpace Sales

Sales grew 19% in the fourth quarter to $9.6 billion while earnings of $4.67 per share for this homebuilder stock marked 26% growth. Earnings over the past seven quarters have grown in high-double digits, outpacing robust sales growth over the period. The company pays an annualized 1.12% dividend yield.

The stellar performance earned the homebuilder stock a top notch EPS Rating of 98. It also boasts a high Composite Rating of 98 while its 93 Relative Strength Rating also shows technical strength. The RS line, which compares the performance of the stock with the S&P 500, is at a 52 week high.

D.R. Horton builds and sells home under different brands.

“Express Homes,” at the lower end of the spectrum, compete with high-end “Emerald Homes” and low maintenance “Freedom Homes.” The company has offices in 33 states and operates in 106 markets. It also owns subsidiaries that offer mortgage financing, title and insurance services.

In December, the Fort Worth homebuilder acquired Riggins Custom Homes in Northwest Arkansas. It also bought Vidler Water Resources in May, in an all cash deal valued at $15.75 per share.

Homebuilder Stock Boasts Solid Ratings

The homebuilder stock ranks sixth in the residential and commercial building group, which holds a high 14th place among IBD’s 197 industry groups. Other stocks in the group include GreenBrick Partners (GRBK), KB Home (KB) and Pulte (PHM).

Mutual funds hold 58% of the stock. But institutional ownership has been declining in the last four quarters, as rising interest rates pressure homebuilder stocks. Exchange-traded funds iShares U.S. Home Construction ETF (ITB) and SPDR S&P Homebuilder ETF (XHB) also own shares.

Group earnings are expected to slow, even for the strongest components of the group with solid financials, like D.R. Horton.

Please follow VRamakrishnan @IBD_VRamakrishnan for more news on growth stocks.

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