Home Builder Pick for Today’s Housing Market

Let’s talk about home builder D.R. Horton (NYSE:DHI).

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Existing home sales data this week made me feel a lot better that there really is an inflexion going on in the housing market, coupled with recent bank lending trends, and again, getting back to the notion that the rent is indeed, too high.

I see real demand that will be marked by increases in first-time home buyers, that’s really the key.

Now, D.R. Horton is the number one builder in the country, the company operates in 27 states and 79 markets. They’ve got the right product mix. You see, for the last couple of years when the high-end stuff was selling, fine, they had a whole bunch of that. But now in the second half of the year, as the man goes for homes under $250,000, they’ve got those as well.

In its most recent earnings report, the company’s backlog was up 18% (value of it) and homes in general were up 5%. Home sales were up 20%, but more importantly, that gross margin was up to 22.5% from 20.4% a year ago. In 2011 it was 16%. Huge margin expansion!

Right now I’m looking for the stock to rally to $27, you’ve got some technical resistance there, but after that I think $35 is really, very doable.