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This Stock Is Down 40% in June — Is It a Buy?

Dream Finders Homes (DFH -1.57%) was founded in 2008 and is based in Jacksonville. It has a large presence in its home market and also operates in the Orlando area, as well as in both Carolinas, Texas, Colorado, and a few other markets.

Until recently, Dream Finders’ stock had weathered the market downturn fairly well. But that hasn’t been the case in June. Shares of the homebuilder have plunged by about 40% so far this month. While there are some legitimate concerns in the homebuilding space, there’s a lot to like about this business, as well.

Dream Finders Homes in a nutshell

Dream Finders is a midsized but rapidly growing builder. It closed on 4,874 homes in 2021, its best year yet, and anticipates closing on at least 7,000 in 2022. It entered the year with a massive backlog and expanded its business significantly through the acquisition of Texas-based McGuyer Homes.

The unique part of Dream Finders’ business is its capital-light homebuilding model. Typically, builders acquire large plots of land, develop neighborhoods, and incrementally sell the lots to buyers. The problem is that this model ties up a lot of capital in land holdings that could be used to invest elsewhere in the business. Dream Finders controls nearly 40,000 lots through purchase-option contracts, but it doesn’t actually buy any land until it has a sold home ready to be built.

This allows Dream Finders to consistently generate higher returns on equity than its peer group (40.9% in the first quarter of 2022, versus 28.7% for its peer average). The only other major builder to use such a model is NVR, which not only has produced some of the best long-term returns of any stock in the market, but also has an asset-light model that allowed NVR to be one of the only homebuilders to maintain profitability during the 2008-2009 recession.

Not only does Dream Finders use a time-tested model that should help produce excellent profitability, but it also focuses on some of the hottest housing markets in the United States. In Dream Finders’ markets, population growth is four times the national average, job growth has significantly outpaced the rest of the country, and home prices and taxes are relatively affordable.

Recent data has been scary

Across the board, data involving home sales hasn’t been great. Just to run down a few key data points:

  • New home sales fell by 16% in April (based on signed contracts), and the median selling price was $450,600, 20% higher than the same time last year. Dream Finders entered 2022 with a backlog that should keep it busy until 2023, but this is still a concern.
  • Housing starts fell 3.5% in May, compared with a year prior, the second consecutive month of declines.
  • Mortgage rates have surged from about 3.25% at the beginning of 2022 to 6.28% as of the latest available data. This makes homeownership far less affordable and could cause the market to cool off considerably.

To make matters worse, Dream Finders was the target of a recent analyst downgrade, citing the company’s high exposure to entry-level homebuyers and the contract prices for the land in Dream Finders’ controlled portfolio. To be fair, those are legitimate concerns in the near term.

A great long-term play on some of the most promising housing markets

While the near term might be a little challenging, especially in terms of new purchase contracts and maintaining profit margins, Dream Finders has a winning business model and a focus on some of the most promising housing markets in the United States. This fast-growing homebuilder still looks like a long-term winner, and with the stock down by 40% over the past few weeks as uncertainty builds in the housing market, now could be a smart time to take a closer look.

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