We recently published a list of Jim Cramer on Microsoft and Other Stocks. In this article, we are going to take a look at where D.R. Horton (NYSE:DHI) stands against other Jim Cramer’s stocks.
Jim Cramer, host of Mad Money, discussed Tuesday’s market action, noting that the rally following President-elect Donald Trump’s victory temporarily slowed down as Wall Street begins to assess the potential effects of broad tax cuts on the bond market. Cramer pointed out that while the stock market typically reacts positively to tax cuts, there’s a catch.
“What if the Treasury doesn’t have the money? Then just like everybody else, the government has to borrow to make up the difference and it borrows by selling bonds, trillions, trillions of dollars worth of bonds.”
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Even though these tax cuts have not yet materialized, Cramer observed that the bond market seems to be sending a warning signal. He asked whether the country could face an interest rate reckoning if it borrows too much, and pointed out that this is a concern on many minds right now. Cramer continued by suggesting that perhaps investors have been too focused on the stock market rally, putting the cart before the horse, with the horse being the bond market.
Cramer acknowledged that stocks have surged since Trump’s election, but the rally has been uneven. While many investors expect tax cuts across the board—on corporate income, individual income, and capital gains—no one is exactly sure what form these cuts will take. However, it’s widely anticipated that overall taxes will be lower. Cramer noted:
“If it’s at all like 2016 when Trump first became president, the wealthy will be the biggest beneficiaries. And when rich people get more money, the theory goes they invest in stocks, create new businesses… It has always worked for the stock market.”
But Cramer warned that there’s another side to the equation: the bond market. On Tuesday, it became clear that investors in bonds were reacting nervously to the possibility of unfunded tax cuts. Interest rates surged across all maturities, signaling a shift in sentiment. Cramer emphasized that when you look at how large and fast the bond market’s move has been, it highlights a critical concern: the federal government is already borrowing trillions of dollars from the bond market, and this is happening before any tax cuts have even taken effect. He explored the possibility that this is why the bond market is responding so negatively, making it more difficult for the stock market to keep climbing at the same pace.
“If you believe we’re about to get big tax cuts, remember that somebody eventually has to pay for the missing tax receipts, as boring as that is, even if that means the government borrows a lot more money, causing bond yields to spike. We can only hope the stock market goes back to ignoring long-term interest rates or that those rates come back down in response to some benign inflation numbers.”
Our Methodology
For this article, we compiled a list of 8 stocks that were discussed by Jim Cramer during the episode of Mad Money on November 12 and listed the stocks in the order that Cramer mentioned them.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A construction site of a multi-family residential complex, a modern urban skyline in the background.
D.R. Horton, Inc. (NYSE:DHI)
Cramer mentioned that homebuilders like D.R. Horton, Inc. (NYSE:DHI) got hit on Tuesday due to higher interest rates.
“Lots of home builders, for instance, got clocked as they should with higher rates. D.R. Horton, which caters to the less wealthy, saw its stock fall $5 or 3%.”
D.R. Horton (NYSE:DHI) is one of the largest homebuilders in the United States, with a history of closing over 1.1 million homes across 125 markets in 36 states. Recently, however, it reported disappointing results for its fiscal fourth quarter, revealing that affordability challenges are beginning to hinder potential buyers. According to Bloomberg, some buyers seem to be holding off on purchases in anticipation of lower interest rates in the coming year.
According to CEO Paul Romanowski, while some homebuyers are waiting for financing costs to drop below a certain threshold, the company believes that “stability in rates” would be the most effective factor in driving demand. Romanowski emphasized that predictability in mortgage rates would help buyers make more confident decisions and create a more favorable market environment for the company.
According to TipRanks, on November 7, Raymond James downgraded D.R. Horton (NYSE:DHI) to Market Perform from Outperform with no price target. The firm cited a “higher for longer” outlook on mortgage rates and housing affordability. This shift reflects the market’s broader concerns in the wake of recent election results, which have contributed to a cautious view of the housing market.
The downgrade also led the firm to lower its EPS estimates for the company, particularly in light of the pressures on entry-level homebuilders. The analyst pointed out that first-time homebuyers, a key demographic for the company, are likely to face even greater affordability hurdles as they head into the spring market.
Overall, DHI ranks 1st on our list of Jim Cramer’s stocks. While we acknowledge the potential of DHI as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than DHI but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.