D.R. Horton built on its prior success during the At-Home Revolution
One of Valens’ most successful stock picks back in 2015 was a homebuilder ready to execute after the Great Recession. We found this name by screening with three key metrics, all adjusted using the Uniform Accounting lens.
Today, we also highlight our FA Alpha 50 screen, which leverages this investment strategy to produce outsized returns in excess of the market over long periods of time.
Coming out of the housing boom after the pandemic, this same homebuilder has appeared once again as being a profitable, high-growth company at attractive valuations.
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In 2015, we added D.R. Horton (DHI) to our Conviction Long List, and it was one of the most successful recommendations in our conviction long list.
D.R. Horton is the largest homebuilder by volume in the United States. During our recommendation period between July 2015 and July 2021, the stock returned over 260%, well in excess of the S&P 500.
D.R. Horton was initially compelling to us because it exhibited all of the key traits that make a company show up as an FA Alpha 50 name. The FA Alpha 50 focuses on companies that have high quality, high growth, and low valuations, and that’s exactly how we first picked up D.R. Horton to show up first in 2015.
Now, it is showing up once again.
Back in 2015, the entire homebuilder sector was finally recovering from the Great Recession and the housing bubble bursting. But that industry recovery alone isn’t what helped push D.R. Horton’s impressive growth.
It was also perfectly positioned for the parts of the market that were in demand as recovery accelerated. This included starter homes for millennials finally getting a place of their own and retirement communities for baby boomers looking to downsize.
Those surges in demand allowed D.R. Horton’s return-on-assets (“ROA”) to rocket from 6% in 2012 to 13% in 2019.
Then, as the At-Home Revolution took off during the pandemic and housing demand rose even higher, ROA further increased to 24% in 2021.
Thanks to these strong tailwinds, D.R. Horton consistently saw growth in the high single-digits or low double-digit levels.
Yet, back in 2015, its Uniform P/E ratio was sitting at low 14x levels, just as fundamentals were starting to take off. And even as D.R. Horton flourished throughout the At-Home Revolution, valuations have continued to drop, with Uniform P/E currently sitting at only 5x to 6x levels.
Interest rates have people concerned about the future state of the housing market, but with low valuations, high returns, and strong growth, D.R. Horton still looks like a compelling company.
The reasons we liked it in 2015, even before it appreciated more than 250%, are the reasons we still like it today, and that is what makes D.R. Horton into such an interesting FA Alpha 50 name.
Throughout financial market history, many of the world’s most successful investors have been candid in their belief that Generally Accepted Accounting Principles (“GAAP”) distort economic reality.
Warren Buffett, for example, once said investors should “concentrate on the world of companies, not arcane accounting mathematics.”
Investors who neglect the very real issues with as-reported accounting can find themselves caught up investing with the crowd, blindly following hot “themes” without a thorough grasp of how to understand the businesses in question.
The only true way to focus on the “world of companies,” as Buffett suggests investors do, is to present a clear picture of how a business operates, something that can only be done by adjusting financial statements to reflect the arbitrary nature of certain accounting rules that leave much to discretion.
The world’s best investors understand the need to make these adjustments, which allows them to focus not on picking out the most popular companies, but rather looking for great names in sleepy areas that the market isn’t paying much attention to. From there, the goal is to then identify quality companies with significant growth potential at reasonable prices.
That’s exactly what we’ve set out to do with the FA Alpha, our monthly list of 50 companies that rank at the top for quality, high growth, and low valuations.
This list has outperformed the market by 300 basis points per year for over 20 years now, effectively doubling the performance of the market by focusing on the real fundamentals and valuations of companies with our proprietary Uniform Accounting framework…
See for yourself below.
If you’re interested in seeing the other 49 names on this month’s FA Alpha, click here to learn more.
Joel Litman & Rob Spivey
Chief Investment Strategist &
Director of Research
at Valens Research