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Sohn Conference: D. R. Horton (DHI), Assured Guaranty (AGO), and Palo Alto Networks (PANW) Put Under the Microscope

The Sohn Conference in New York, one of the biggest annual investment events, took place yesterday, with presentations from titans of the investment world like Larry Robbins of Glenview Capital, John Khoury of Long Pond Capital, and Jeffrey Gundlach, the CEO of DoubleLine Capital. Insider Monkey’s founder Ian Dogan was in attendance, allowing us to share exclusive insights from presentations made by the hedge fund world’s best and brightest.

D. R. Horton Inc (NYSE:DHI), Assured Guaranty Ltd. (NYSE:AGO), and Palo Alto Networks Inc (NYSE:PANW) were three of the stocks pitched on Monday, with two of them receiving bullish calls, while billionaire investing legend David Einhorn of Greenlight Capital was bearish on the other. We’ll examine the details of those calls below.

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D. R. Horton Inc (NYSE:DHI)

Let’s start with D. R. Horton Inc (NYSE:DHI), which was pitched by John Khoury of New York-based Long Pond Capital. The fund, which manages a 13F portfolio valued at $3.53 billion as of December 31, had over 15% of that figure ($540 million) invested in a long position in D. R. Horton Inc (NYSE:DHI) at the end of December, more than twice as much as any other stock. The fund also had a $105 million call position on the stock.

Khoury detailed some of the reasons why his fund is so bullish on D. R. Horton Inc (NYSE:DHI), beginning with the company’s transition into more of a pure-play home manufacturer focused on the entry-level homes market, which he says is the healthiest segment of the market. Existing-home inventory hit a record low heading into 2018, which has pushed home prices beyond the reach of many Millenials, millions of whom are in the market for a home. That should ensure strong demand for precisely what D. R. Horton Inc (NYSE:DHI) is built to offer now. Furthermore, Khoury and his team like the fact that D. R. Horton’s prime geographical regions are all experiencing net migration and have job growth rates exceeding the national average.

Khoury categorizes traditional homebuilders as operating in two distinct categories, land acquisition and development, and home manufacturing. Khoury praised D. R. Horton for focusing its model away from the capital-intensive former and into the free-cash-flow generating latter, which leads to far less risk and a higher return on equity. Khoury cites NVR, Inc. (NYSE:NVR) as a prime example of the effectiveness of this model in action, noting that in the lead up to the financial crisis, it outperformed traditional homebuilders by over 300% and continued to generate positive earnings through 2008 and 2009.

Nor is Khoury fazed by concerns over the effect that rising interest rates might have on the low-end of the market (or on homebuilders in general), dismissing the prevailing narrative that says they shouldn’t be invested in for that reason. Khoury believes rising interest rates are already priced into the stock and that homes are still affordable, as median mortgage payments as a percentage of median post-tax income stands at just 25%. That figure will rise to less than 30% should interest rates rise by another 100 basis points, which would still be well below the 40% figures in 2006/2007 that preceded the housing market crash.

All told, Khoury envisions D. R. Horton as having 63% upside potential, with a target earnings multiple of 13X (compared to 8X today) once the market prices in its transition away from traditional homebuilding to home manufacturing.

On the next page we’ll check out the pitches for Assured Guaranty Ltd. (NYSE:AGO) and Palo Alto Networks Inc (NYSE:PANW).

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