The Buckingham Report

It’s doubtful that crossword puzzle fans have ever come across this clue, but we suspect that subscribers of The Prudent Speculator easily would be able to fill in the answer. They should be well aware of the only company out there to have posted record revenue and earnings for 28 years with year 29 anticipated to continue the winning streak. And no, though it does have six letters in its name, the stock in question is not Google (GOOG)! The Ultimate Growth Stock, which might also be called the Ultimate Value Stock, is none other than Horton, as in the homebuilder D.R. Horton (DHI).

At the recent Orlando MoneyShow, I was enlisted to give a two-hour intensive presentation, entitled “Prudent Stock Selection and Analysis.” I will offer an updated version of this paid event (tuition goes to the MoneyShow, not to me!) in Las Vegas in May, but I thought it would be of interest to all to share some of the PowerPoint slides I put together for this seminar (PDF), especially as two of the usual doom-and-gloom publications, Barron’s and The Wall Street Journal, have recently come out with bullish articles on stocks in the homebuilding sector, sending the shares shooting higher this week.

I understand that the narration is lacking (have to save something for the paying customers), but I think Buckingham Report readers will get the gist of the argument in favor of Horton and against Google. Don’t get me wrong, I do believe that Google is a great company with excellent growth potential, but the shares ain’t exactly cheap. Of course, I also like to joke that we really don’t need a roof over our head, but we do need more internet search capabilities and more cost-effective internet advertising. And, of course, there really is no competition in any of Google’s businesses, right?

Bottom line, in my opinion, is that if Horton made iPods, routers or some technological gadget that might be obsolete by next Christmas, the stock price would likely be well into the triple-digits. Alas, building houses isn’t as sexy as making a widget, but name me a tech company that has grown net income at a 50% compounded annual rate over the last five years as has D.R. Horton.

Certainly, I understand that housing has historically been a cyclical industry, existing home sales have recently weakened and price appreciation has slowed, but Horton's management believes that the company will be able to grow revenue 10% to 15% annually and net income by 15% to 20% per year through the end of the decade. And after 28 years of proving themselves through expansions, recessions, interest rate cycles and various housing bubble-ettes, management has more than earned a little credibility.

Looking out even further, consider what another of America's largest homebuilders, Hovnanian Enterprises, had to say in its most recent annual report: "Over the longer term, demographic trends, driven by household formation and population growth will continue to underpin demand for housing. At the same time, the regulatory environment in many markets keeps the supply of homes artificially below demand. The Brookings Institution estimates that total U.S. housing starts will need to average two million homes annually until 2030 just to keep pace with demand. This level of activity would represent a further increase over recent production levels and represents more than the average annual 1.6 million U.S. housing starts since 1971. But it is not surprising given the number of new households that are projected to form each year and the need to replace homes due to their age and obsolescence, as well as the demand for second homes by affluent baby boomers."

Oh, and did I mention that the P/E ratio on DHI is 7, while GOOG trades for 66 times earnings?

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Opinions expressed are those of John Buckingham, which are subject to change without notice and are not intended to be a forecast of future events, a guarantee of future results, nor investment advice. Performance results of such recommendations are subject to risks and uncertainties including (i) national and international economic conditions and fluctuations, (ii) economic conditions of particular industry and service sectors, (iii) the ability of the management of the company whose security is recommended to perform and achieve expected results of operations.

Past Performance is no guarantee of future results.

Al Frank Asset Management, Inc. (AFAMI) is adviser to its own proprietary mutual funds and is the manager of individual client investment accounts. As adviser to its own proprietary mutual funds and manager of individual client accounts, AFAMI may purchase, sell or hold positions in the securities that appear in the Buckingham Report. Also, AFAMI employees may hold, purchase or sell any of the stocks that appear in the Buckingham Report subject to AFAMI’s Insider Trading policies.

The information contained herein is believed to be reliable. However, such information has not been verified by us and we do not make any representations as to its accuracy or completeness.

About Al Frank Asset Management

Al Frank Asset Management, Inc. (AFAMI) is an Investment Adviser, registered with the Securities & Exchange Commission, editor of The Prudent Speculator (TPS) newsletter, editor and publisher of The Prudent Speculator TechValue Report (TVR) newsletter, and is the Investment Adviser for separately managed accounts and two value oriented no-load proprietary mutual funds.

Al Frank Asset Management, Inc. is committed to assisting our customers build wealth. We are a leading resource for value-based investor information in the financial community, where we combine our simple, proven philosophy of buying under valued securities for their long-term appreciation with our experience, hard work, and intensive research to give you actionable investment information that can be used on a daily basis.