There’s no hiding the truth. Housing stocks have been on fire over the past three months, a stretch in which the SPDR S&P Homebuilders ETF (NYSEARCA:XHB) has risen about 70%. The boom has been fueled by the easing of Covid-19 fears and investors betting on a swift, strong recovery of the U.S. housing market in the second half of 2020.
Leading the rally, of course, has been America’s largest homebuilder, D.R. Horton (NYSE:DHI). Over the past three months, DHI stock has surged about 30% to levels just shy of its all-time highs.
Is this rally warranted? After all, isn’t a second wave of Covid-19 upon us? Won’t that kill the U.S. housing market recovery, and, by extension, D. R. Horton?
Believe it or not, that won’t happen. Instead, DHI stock is well-positioned to take out the $60 level soon.
A Persistent Recovery
I like to characterize the current U.S. economic recovery, as well as the current recovery of the U.S. housing market, as persistent. And, by that I mean that this recovery will persist through many headwinds, including a second wave of Covid-19.
Long story short, the pandemic isn’t over. Far from it. People are still getting sick, and people are still dying. But American consumers and companies are increasingly learning how to keep the world turning while, at the same time, mitigating Covid-19 risks with things like social distancing and wearing masks.
Both consumers and companies will get better at this balancing act over the next few months. As they do, economic activity will continue to perk up and shake off setbacks, including a second wave.
So over the next few months, the housing market will steadily, consistently, and meaningfully improve.
Simply look at the positive fundamentals surrounding the housing market:
- Existing homes sales have plunged over the past few months. But people still need a place to live. Thus, this plunge in existing home sales has just created pent-up demand for homes that will have a positive impact over the next few months.
- Mortgage rates are at all-time lows. Low rates mean cheaper financing. Cheaper financing attracts more home buyers.
- Most Americans are saving their paychecks today, providing ample ammunition for buying homes in the coming months.
- Millennials are finally moving out of their parents’ homes, and the U.S. home-ownership rate is rising off multi-decade lows.
As a result of these factors, the U.S. housing market is set for consistent and significant improvement over the next few months. Alongside that improvement, housing stocks will stay in rally mode.
D.R. Horton’s Attractive Fundamentals
D.R. Horton is supported by attractive fundamentals which lay the foundation for DHI stock to remain strong for the foreseeable future.
First, the company is America’s largest homebuilder, with wide exposure across 29 states and all price ranges.
Naturally, then, no matter what part of the housing market will recover over the next few years, that improvement will show up in some form on D.R. Horton’s income statement.
Second, D.R. Horton is the number-one homebuilder in America’s fastest growing housing markets, including Dallas, Houston, Atlanta, Phoenix and Austin.
The growth in those markets is mostly due to first-time, young home buyers. Those young home buyers, who generally are not at great risk from COVID-19, are likely to come back into the market with force over the next few months. As a consequence, D.R. Horton’s core markets should rebound strongly.
Third, many of D.R. Horton’s core markets, like Dallas, Houston, Austin, and Phoenix, are located in states with relatively loose Covid-19 restrictions. As a result, those states’ housing markets should rebound more quickly than the housing markets of, say, California or New York. A quicker rebound of the company’s core markets will lay the groundwork for a quicker rebound by DHI stock.
All in all, the fundamentals underlying DHI stock are, at present, quite attractive.
Can D.R. Horton’s Stock Reach $60?
My estimates show that DHI stock is positioned to rise above $60 soon.
Before Covid-19 emerged, analysts’ average 2021 earnings per share estimate for D.R. Horton sat around $5.50. Their average 2021 EPS estimate for the firm has since plunged. But, more importantly, the average EPS estimate stopped plunging in May.
So far in June, analysts’ average 2021 EPS estimate for D.R. Horton has risen from about $4.40 to over $4.50.
As the U.S. housing market in general and the Arizona and Texas markets in particular continue to improve over the next few months, D.R. Horton’s results and guidance will beat analysts’ average outlook. As a consequence, Wall Street analysts will keep hiking their profit estimates for the company.
When all is said and done, I wouldn’t be surprised to see their average fiscal 2021 EPS estimate roar back to $5.50 by the end of the year.
If that does happen and DHI stock continues to have a forward earnings multiple of 11, which is its historical average, then the stock will exceed $60 by the end of the year.
The Bottom Line on DHI Stock
The U.S. housing market is on the cusp of a big recovery. The stock prices of homebuilders mostly reflect this recovery. But DHI stock can climb further, given its favorable geographic concentration and its strong, underlying fundamentals.
Consequently, I wouldn’t sell shares of DHI stock in the wake of its recent rally; I’d stick with the shares.
Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm. As of this writing, he did not hold a position in any of the aforementioned securities.