D. R. Horton Valuation Too Good to Pass Up

May.30.07 | About: D. R. (DHI)

Every once and a while I will purchase a "basket" of stocks that I think will do very well over time. Usually, I have a strong opinion about a given industry but may not be certain that one and only stock in that industry is the "right" stock to buy. So, I buy a number of stocks that I think will, on average, perform better than the market and if my thesis proves correct, all of the stocks in the "basket" could do very well. The industry I am thinking of now is the housing industry.

Ask anyone and they will tell you that this industry is in deep trouble. The sub-prime mortgage crisis, flippers not being able to move inventory, rising bankruptcies, falling real estate prices - and so on goes the list of significant negatives for the housing industry.

The homebuilding stocks, on the other hand, look very attractive to me now. Take DHI for example - 2.7% dividend yield, 1.06x book value, 7.0x P/E, 0.5x sales - all very impressive. Skeptics might say that it's too early and this stocks could see additional losses, more pressure on earnings and that we could be years away from a recovery in housing. I would say all we need is a deceleration in the pace of bad news and these stocks could find a bottom. I might be early (I often am). I might be wrong (it's happened before), but I have a hard time finding anything that looks this cheap. Obviously, the negatives are well known and these companies' management teams are working overtime to adjust their business models to accommodate this brave, new operating environment.

DHI is my first purchase of my housing stock basket. I will add others when they reach my buy targets. I initiated a position in DHI at $22.00 on 5/10/07 and as of this writing (5/10/07) DHI represents 2.4% of my portfolio.

Full disclosure: Long DHI