This Stock Is Beaten Down Now, but I Think It Could 10X

It has been a rough few months to be invested in homebuilder stocks. This is especially true for Sun Belt-focused builder Dream Finders Homes (DFH -3.18%), which is down by about 50% from its 52-week high. To be sure, the business itself continues to perform quite well. In the most recent quarterly report, Dream Finders' homebuilding revenue increased 10% year over year, margins remained strong, and net new orders increased by 9%. Plus, Dream Finders reported a backlog of about $2 billion worth of sold homes. However, due to stubbornly high mortgage rates and potential tariff headwinds, the stock has been beaten down and is now trading for less than 7 times forward earning estimates. And even though Dream Finders is already a large investment in my portfolio, I'm considering adding more shares right now. Why is Dream Finders Homes beaten down? In short, there is quite a bit of uncertainty in the homebuilding industry right now due to a combination of housing market conditions and tariff worries. Mortgage rates remain in the 7% ballpark, which has kept many would-be homebuyers and sellers on the sidelines. For much of the 2022-2024 real estate slowdown, homebuilders have been able to attract buyers with incentives such as mortgage rate buydowns, but this seems to be less effective now. Sales expectations by homebuilders are at their lowest level since late 2023, according to the National Association of Home Builders' Housing Market Index. Furthermore, tariffs could affect homebuilders more than you might think. Roughly one-third of the lumber used in home construction is imported (mostly from Canada), and the same is true of other components used in new homes, such as appliances. Steel and aluminum are also currently targets of tariffs and play a significant role in the homebuilding process. To be sure, if and when tariffs will actually go into effect is still very much in flux right now. But if they do, they could squeeze homebuilders' profit margins at a time when sales volume is already expected to be rather low. A massive opportunity Dream Finders has been around for a little over 15 years and has grown impressively from 27 homes in its first full year (2009) to an estimated 8,250 in 2024. It is based in Jacksonville, Florida, and has operations in some of the fastest-growing markets in the U.S., including Orlando, both Carolinas, Georgia, Colorado, and Texas. The company takes a land-light approach, using purchase option contracts to control buildable lots without tying up much capital. This model was pioneered and perfected by long-established homebuilder NVR, which has used it to deliver a roughly 90,000% total return since its 1993 initial public offering (IPO). Now, I'm not saying that Dream Finders will perform that well, but this model allows the company more financial flexibility than the traditional model of buying large tracts of land to develop neighborhoods. Dream Finders has grown rapidly through acquisitions and just recently expanded into the massive Atlanta housing market by acquiring a private homebuilder. It is also worth noting that Dream Finders specializes in entry-level and "first move-up" homes. With a housing shortage of millions of homes in the U.S. and tons of pent-up demand from the past few years of high mortgage rates, Dream Finders could be in a great position to benefit. That's especially true with the relatively affordable nature of Dream Finders' core markets. Not a low-risk stock, but massive potential To be clear, Dream Finders isn't a low-risk stock. For one thing, it has more debt (as a percentage of total capitalization) than most other homebuilders. It also continues to grow rather aggressively and, for the time being, is rather geographically concentrated in the Southeastern United States. Even if things are going well for the company, expect a bit of a roller coaster ride along the way. For context, for Dream Finders to 10x from its current level, it would imply a market cap of just over $20 billion (probably less if management continues to buy back shares). This would make it less than half the size of leading homebuilder D.R. Horton (NYSE: DHI) and about 60% of the size of Lennar (NYSE: LEN). Achieving this level of scale would clearly require a lot to go right in the coming years. However, if the company continues to expand its footprint and allocate capital well, it could certainly get there within the next 15 years -- especially considering how impressive Dream Finders' first 15 years have been.