We recently compiled a list of the 10 Most Undervalued Large Cap Stocks To Invest In. In this article, we are going to take a look at where DR Horton Inc. (NYSE:DHI) stands against the other undervalued large cap stocks.
Are Cyclical Stocks The New Investment Strategy?
As significant gains are already being realized after the Fed’s aggressive September interest rate decision, historical trends suggest that markets typically remain flat or slightly up in the 30 to 60 days following the first rate cut. Positive factors contributing to the current rally include a strong internal market dynamic, with a large portion of the S&P 500 trading above their 200-day moving averages, and optimism surrounding the stimulus measures from China.
At such a time, investors are cautioned against assuming certainty in market outcomes. They are advised to consider protective strategies, such as exploring shorter-duration bonds as a hedge against potential rapid rate cuts by the Fed. Overall, focusing on sectors with strong fundamentals while remaining adaptable can help investors navigate economic uncertainties. Liz Young Thomas, SoFi’s head of investment strategy, holds a similar sentiment. We covered her opinion in our article about the 8 Most Active US Stocks To Buy Now, here’s an excerpt from it:
“When discussing valuation concerns, Young agreed that while US market multiples are relatively high, hovering around 21 to 22, this is not unprecedented when compared to historical standards. She pointed out that current valuations are above both the 5-year and 10-year averages but not at overbought levels… Young expressed a desire for the market to shift towards trading based on fundamentals rather than multiple expansions. She noted that while earnings stability is crucial, there are signs of strength in sectors outside of technology, particularly in industrial stocks… As for identifying sectors with potential for faster earnings growth, Young emphasized the importance of thorough research and analysis rather than relying solely on top-down market movements… she advised investors to remain vigilant and consider protective strategies. She suggested exploring opportunities across the Treasury curve, particularly in shorter-duration bonds, as a hedge against potential faster-than-expected rate cuts by the Fed. ”
Scott Chronert, Citi US equity strategist, joined CNBC’s ‘Squawk on the Street’ on October 2 to discuss his assessment of the major averages and stocks to end the year and how investors should lean into growth and cyclicals to manage potential market choppiness.
Scott Chronert set a target for the S&P 500 at 5,600. As the market entered October, significant global events have unfolded, including stimulus measures from China and ongoing geopolitical tensions marked by strikes in the Middle East. Chronert acknowledged that while these developments are crucial, translating them into actionable investment strategies has proven challenging, particularly in light of the ongoing conflicts involving Russia, Ukraine, and Israel.
Addressing the geopolitical landscape, he noted that the situation in the Middle East remains unpredictable and continues to be a wild card. This uncertainty has prompted a tactical shift towards an overweight position in energy stocks as they enter the fourth quarter, suggesting that rising tensions could benefit this sector. However, he characterized this move as somewhat contrarian given the current market climate.
When discussing monetary policy, Chronert indicated that the Fed is still in a less restrictive mode and has not yet reached a point where it can be considered fully accommodative. The focus is on balancing growth while adopting a defensive stance as the year concludes. This approach includes an overweight position in financials while avoiding more defensive sectors that are historically viewed as expensive. He pointed out that healthcare is somewhat of an exception to this trend, but overall, there is no urgency to invest heavily in traditionally defensive sectors.
The conversation also touched on the Fed’s role in achieving a soft landing for the economy. Chronert believes that if the Fed continues to lower interest rates, as indicated by market expectations of potential cuts totaling up to 200 basis points, it could create a favorable environment for equities. However, he acknowledged that markets have misjudged Fed actions in the past.
The discussion raised concerns about potential risks facing both monetary policy and economic performance. Chronert emphasized that the greater risk lies in the Fed needing to stay ahead of economic narratives rather than falling behind. A deterioration in labor conditions could lead to further rate cuts; however, he cautioned against viewing this solely as negative for equities. Instead, he sees potential risks related to inflation stemming from rising commodity prices due to geopolitical tensions.
Looking ahead to 2025, he expressed concerns about how ongoing discussions regarding deficit financing might impact markets, particularly regarding bond market dynamics and potential pressures from bond vigilantes. He noted that while immediate risks may seem manageable, longer-term implications could arise from political developments surrounding US elections.
Additionally, he suggested that markets could see supportive conditions with expectations of rate cuts, potentially 50 basis points in November while expressing contentment with either 25 or 50 basis points as long as the overall trajectory remains constructive.
Analysts are increasingly optimistic about large-cap stocks, viewing them as a strong investment choice amid current market volatility. Scott Chronert’s assessment aligns with this perspective, as he suggests that leaning into growth and cyclicals could be beneficial for investors navigating the choppy end-of-year conditions. With their stability and potential for steady dividends, large-cap companies are well-positioned to weather economic uncertainties and geopolitical tensions, making them a reliable option for those looking to maintain a balanced portfolio.
Methodology
We used the Finviz stock screener to compile a list of 25 stocks trading over $20 billion, that’s our definition of large-cap stocks. We then selected stocks with a forward P/E ratio under of 15 and made a list of 10 stocks that were the most popular among elite hedge funds and that analysts were bullish on. The stocks are ranked in ascending order of the number of hedge funds that have stakes in them, as of Q2 2024.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A construction site of a multi-family residential complex, a modern urban skyline in the background.
DR Horton Inc. (NYSE:DHI)
Forward Price-to-Earnings Ratio: 12
Number of Hedge Fund Holders: 62
DR Horton Inc. (NYSE:DHI) is the largest homebuilder by volume in the US. It specializes in building new homes and communities across the country, and offers a range of housing options, from entry-level homes to luxury estates, to meet the diverse needs of homebuyers. The focus is on providing quality homes at affordable prices while contributing to the growth of communities.
Other than homebuilding, the homebuilder offers mortgage, title, and insurance. The homebuilder has Express Series for first-time homebuyers, Emerald Series for high-end homes, and Freedom Series for easy living and low maintenance. Rental communities for those who cannot own a home are also available.
The company’s earnings per share increased by 5% year-over-year in FQ3 2024. The company sold 24,155 homes in the quarter, generating $9.97 billion in revenue, up 2.47% from a year-ago period. It also has a strong relationship with Forestar, a company that develops land for building homes. Forestar has a lot of land available, which is good for DR Horton Inc. (NYSE:DHI) because there is a shortage of land for building homes.
Sales orders increased slightly in FQ3, from 22,794 homes to just over 23,000 homes year-over-year. However, the total value of these orders remained flat at $8.7 billion. The cancellation rate increased from 15% to 18% sequentially. The average price of homes sold decreased slightly from $379,800 to $378,900 year-over-year.
For affordability, it offers incentives like lower mortgage rates and has made some homes smaller and cheaper. Based on the strong financial position and expectation for increased cash flows, the board recently approved a new share repurchase authorization totaling $4 billion. DR Horton Inc.’s (NYSE:DHI) is positioned as a leading player in the industry.
Baron Real Estate Fund stated the following regarding D.R. Horton, Inc. (NYSE:DHI) in its Q2 2024 investor letter:
“The shares of D.R. Horton, Inc. (NYSE:DHI) underperformed during the second quarter. D.R. Horton is the largest homebuilder in the U.S., with operations in 119 markets in 33 states, and a focus on more affordable price points (70% of homes closed are below $400,000).
Share prices of U.S. homebuilders more broadly were pressured over concerns that demand for new single-family homes would slow due to stretched consumer affordability (high prices, down payments and mortgage rates) and a rise in home resale inventory across several markets. D.R. Horton has been able to successfully weather these headwinds and continue to grow owing to its affordable price points, low-cost position, and scale advantages.
We remain enthusiastic about the multi-year prospects for D.R. Horton. Our view remains that the U.S. will need to build new homes at an elevated rate for the foreseeable future in order to replenish a current structural deficit of housing stock while also housing a growing population. We anticipate that D.R. Horton will continue to grow faster than the broader housing industry as the company leverages its scale advantages to gain market share across its footprint. Furthermore, we believe that as the company continues to transition its operations to a more asset-light business model that emphasizes returns and cash flow generation, the company’s valuation multiple may expand.”
Overall DHI ranks 8th on our list of the most undervalued large cap stocks to invest in. While we acknowledge the potential of DHI as an investment, our conviction lies in the belief that AI stocks hold great promise for delivering high returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than DHI but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.
