We came across a bullish thesis on Forestar Group Inc. (FOR) on Substack by Unemployed Value Degen. In this article, we will summarize the bulls’ thesis on FOR. Forestar Group Inc. (FOR)'s share was trading at $22.13 as of March 10^th. FOR’s trailing P/E was 6.22 according to Yahoo Finance.

Aerial view of a real estate complex with several residential lots under construction.

Forestar Group (FOR) presents an intriguing investment opportunity, particularly in the current macroeconomic environment. With falling interest rates serving as a short-term tailwind and sustained inflation acting as a long-term catalyst, the company’s unique position as a pure-play lot developer offers a compelling way to capitalize on both trends. Unlike traditional homebuilders, Forestar doesn’t construct homes but instead focuses on acquiring land, securing permits, and developing lots before selling them to builders, primarily DR Horton (DHI). This model allows it to operate as a capital-intensive yet highly scalable land bank, with assets that appreciate over time. The company is trading at just 0.7x book value, despite the fact that its book consists entirely of land, with no goodwill or intangibles. Historically, Forestar’s valuation has cycled up to 1.4x book value, and with book value per share compounding at 16.2% annually over the past five years, this provides a highly attractive risk/reward profile.

Forestar’s business is naturally cyclical, with the timeline from land acquisition to final lot sales stretching as long as twelve years, though the company typically recoups its initial investment within three years. Land prices have historically appreciated at an average of 3% to 5% annually, and with inflationary pressures, this rate could accelerate. Forestar’s $2.7 billion in land holdings represent a compounding asset base, supported by a conservative balance sheet with long-term debt averaging just 4.6% in interest. The biggest risk is its heavy reliance on DHI, which accounts for about two-thirds of sales. However, DR Horton has a master supply and shared services agreement with Forestar and owns 62% of its stock. While Forestar is actively expanding its third-party client base, DHI’s dominant role means any slowdown in its homebuilding activity could weigh on Forestar’s results.

That said, there remains significant room for growth within DHI itself. Currently, just 15% of DHI homes are built on Forestar lots, but this is expected to rise to 33%. As the largest homebuilder in the U.S., with over 12% of all single-family home sales, DHI’s growing reliance on Forestar creates a stable demand pipeline. More broadly, Forestar is working to double its market share from 2.3% to 5% of all U.S. single-family home sales by 2030. If this target is reached, book value per share could rise from $31 today to approximately $65. A return to 1.4x price-to-book multiples would imply a stock price of $91 by the end of the decade.

The biggest wildcard remains DR Horton’s eventual monetization of its stake. While it is likely that DHI will sell its shares at some point, the impact on Forestar’s valuation and capital allocation policy remains uncertain. Currently, profits are reinvested into land, with no dividends or buybacks, but this could change once market share targets are met. For now, a disciplined approach of selling when valuations reach historical peaks (1.4x book) and re-entering when valuations dip below 0.7x book provides an attractive way to navigate the opportunity. At $22.21 per share, Forestar is significantly undervalued, offering the potential for strong returns over the next several years.

Forestar Group Inc. (FOR) is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 16 hedge fund portfolios held FOR at the end of the third quarter which was 18 in the previous quarter. While we acknowledge the risk and potential of FOR as an investment, our conviction lies in the belief that some 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 FOR 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 was originally published at Insider Monkey.