D.R. Horton (DHI) Overbought Despite Valuation Concerns

D.R. Horton, Inc. (DHI) shares rose more than 1% during Friday’s session despite a downgrade from Wedbush. Analyst Jay McCanless downgraded D.R. Horton stock from Outperform to Neutral but retained his $75.00 price targetsaying that the downgrade was strictly due to valuation and that the stock fairly reflects the housing industry’s outlook.

Key Takeaways

  • D.R. Horton stock has risen more than 40% year to date, which led Wedbush to downgrade the stock on valuation.
  • The relative strength index (RSI) continued its march into overbought territory with a reading of 78.78.
  • Despite the lofty valuation, some analysts believe that the company’s strong fundamentals justify a premium.

Last quarter, the company delivered better-than-expected third quarter financial results and above-consensus guidance for the fourth quarter. Revenue rose 9.8% to $5.39 billion, beating consensus estimates by $400 million, while earnings per share came in at $1.72, beating consensus estimates by $0.43.

Many analysts were bullish on D.R. Horton stock following the financial results in late July. BTIG analyst Carl Reichardt was the most bullish with a price target of $85.00 per share, citing deep local share positions, an efficient business model, and a focus on affordably entry-level homes, which warrants the company’s relative premium valuation compared to some of its peers.

TradingView.com

From a technical standpoint, D.R. Horton stock continues to make fresh highs, having risen more than 40% since the beginning of the year. The RSI moved further into overbought territory with a reading of 78.78, but the moving average convergence divergence (MACD) continued its slow trend upward.

Tip

Moving average convergence divergence (MACD) is a trend-following momentum indicator that shows the relationship between two moving averages of a security’s price. The MACD is calculated by subtracting the 26-period exponential moving average (EMA) from the 12-period EMA.

Traders should watch for near-term consolidation given the high RSI readings over the past several sessions before the stock resumes a move higher. In particular, traders should watch for profit-taking to trendline support levels of around $69.00 over the coming sessions. If the stock continues to rise, traders could see an ongoing move to fresh highs.

U.S. Census Bureau, FRED

The wider housing market has benefited from near record low interest rates, which have driven up demand for new and used homes by making them more affordable. Since the pandemic lockdown depressed demand, the market has experienced a V-shaped recovery, with groundbreaking on new homes soaring 22.5% in July.

The Bottom Lin,e

D.R. Horton shares continued to rise on Friday despite a valuation-driven downgrade from Wedbush and overbought technical indicators.

The author holds no position in the stock(s) mentioned except through passively managed index funds.

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