Three Ways To Look At Homebuilding

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; here he reviews three homebuilding stocks, each chosen by a different investment methodology.

Strategy: Growth/Value Investor
Based on: James P. O'Shaughnessy

D.R. Horton, Inc. (DHI) is a homebuilding company. The Company has operations in 84 markets in 29 states across the United States. The first requirement of the Cornerstone Growth Strategy is that the company has a market capitalization of at least $150 million.

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.

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.

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.

Strategy: Small-Cap Growth Investor
Based on: Motley Fool

PulteGroup, Inc. (PHM) is a homebuilder in the United States. The Company offers a range of home designs,  including single-family detached, townhouses, condominiums and duplexes.

This methodology seeks companies with a minimum trailing 12 month after-tax profit margin of 7%. The companies that pass this criterion have strong positions within their respective industries and offer greater shareholder returns.

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