To select positions for the portfolio at his Validea newsletter, John Reese assesses stocks based on the historic criteria used many of the market's most legendary investors; this recommendation is based on a strategy developed by James P. O'Shaughnessy.
D.R. Horton (DHI) is a homebuilding company; it has operations in 84 markets in 29 states across the United States. The company's segments include its 44 homebuilding divisions, its financial services operations and its other business activities.
In the homebuilding segment, the company builds and sells single-family detached homes and attached homes, such as town homes, duplexes, triplexes and condominiums.
Our analysis below earns a 90% rating that is based on the Cornerstone Growth Strategy — a growth and value approach associated with James P. O'Shaughnessy, a leading financial author and founder of O'Shaughnessy Asset Management, LLC.
MARKET CAP: PASS
The first requirement of the Cornerstone Growth Strategy is that the company has a market capitalization of at least $150 million. This will screen out the companies that are too illiquid for most investors, but still include a small growth company. DHI, with a market cap of $22,202 million, passes this criterion.
EARNINGS PER SHARE PERSISTENCE: PASS
The Cornerstone Growth methodology looks for companies that show persistent earnings growth without regard to magnitude.
To fulfill this requirement, a company's earnings must increase each year for a five year period. DHI, whose annual EPS before extraordinary items for the last 5 years (from earliest to the most recent fiscal year) were 2.03, 2.36, 2.74, 4.09 and 4.29, passes this test.
PRICE/SALES RATIO: PASS
The Price/Sales ratio should be below 1.5. This value criterion, coupled with the growth criterion, identify growth stocks that are still cheap to buy. DHI's Price/Sales ratio of 1.23, based on trailing 12 month sales, passes this criterion.
RELATIVE STRENGTH: PASS
The final criterion for the Cornerstone Growth Strategy requires that the Relative Strength of the company be among the top 50 of the stocks screened using the previous criterion.
This gives you the opportunity to buy the growth stocks you are searching for just as the market is embracing them. DHI, whose relative strength is 91, is in the top 50 and would pass this last criterion.
