The market has been surging lately. Through the end of November, the S&P 500 was up 20% for the year and the Nasdaq Composite had risen 37%. Along with market rallies come increased prices for stocks. This is something inventors should be aware of because paying too much for a stock can diminish returns. During a market rally, the trick is to identify great companies that have not become prohibitively expensive.
Here are two stocks that I have been loading up on during this rally because they have bright futures and are still trading for reasonable valuations. Let's dive in and see what makes these stocks a buy right now.
Amazon
E-commerce leader Amazon (AMZN 3.43%) has been on my buy list all year. Heading into 2023, the stock was beaten down by several disappointing quarters in 2022. At the start of this year, Amazon's stock had dropped 51% off its high, presenting a compelling buying opportunity.
The reason for Amazon's rough 2022 makes sense. During the pandemic, the company spent a lot of money to keep up with demand as most of the world was stuck at home. Incredibly, Amazon doubled its distribution footprint in just two years. However, this spending took a toll on the profitability of the company. During 2022, Amazon posted a net loss of $2.7 billion.
This year has been a different story. Through the first nine months of 2023, Amazon has generated net income of $19.8 billion, representing quite a turnaround from last year. The stock has risen accordingly, with shares up 75% year to date. However, even with this recent run-up, Amazon trades for 2.8 times trailing sales and 21 times operating cash flow. Both of these multiples are below their 10-year average. Investors are paying more now than they could have in January, but shares are still within a reasonable valuation range.
Dream Finders Homes
There is a housing shortage in the U.S., which is driving up the cost of existing homes. Homebuilders like Dream Finders Homes (DFH 2.69%) are poised to benefit as they try to build as many homes as they can to fill the deficit. If there are limited existing homes available, potential buyers will be more likely to consider a newly built home. Dream Finders also focuses on the less expensive end of the market, placing its inventory close to affordable areas for first- and second-time home buyers.
Dream Finders has a unique business model in that it doesn't buy large plots of land to build on. Instead, it purchases the option to buy land when and if it wants to at a later time. This means it potentially loses money if it doesn't end up building, but it also means it doesn't have to carry a lot of land on the balance sheet. This method of acquiring land differentiates Dream Finders from some of its larger and more established competitors.
Through the first nine months of 2023, Dream Finders had already closed on 5,161 homes, and in Q3 of 2023, it grew its home closings by 17% over Q3 of 2022. The company also raised its full-year guidance and now expects to reach 6,750 home closings by the end of the year. This has helped drive strong revenue growth and gross margin expansion. In Q3 of 2023, Dream Finders posted year-over-year homebuilding revenue growth of 14% and homebuilding gross margin improvement of 200 basis points.
Dream Finders' stock has had a great 2023 with shares up 194% year to date. While it's not quite as historically cheap as Amazon, I think Dream Finders is still priced reasonably. Its price-to-earnings multiple of 9.7 is slightly higher than the historical average of 7.6 but on a price-to-operating-cash-flow basis, the stock is trading at a discount to its historical average.
