Bretton Fund, an investment management firm, published its second-quarter 2021 investor letter – a copy of which can be downloaded here. A return of 17.03% was recorded by the fund for the first half of 2021, beating its Benchmark, the S&P 500 Index, which returned 15.25% for the same period. You can take a look at the fund’s top 5 holdings to have an idea about their top bets for 2021.
In the Q2 2021 investor letter of Bretton Fund, the fund mentioned NVR, Inc. (NYSE: NVR) and discussed its stance on the firm. NVR, Inc. is a Reston, Virginia-based home construction company with a $17.6 billion market capitalization. NVR delivered a 21.48% return since the beginning of the year, while its 12-month returns are up by 23.85%. The stock closed at $4,987.31 per share on September 27, 2021.
Here is what Bretton Fund has to say about NVR, Inc. in its Q2 2021 investor letter:
“It’s no secret that we’re in the middle of a housing boom. Interest rates are low, household balance sheets are strong, millennials are aging into the house-buying market, and perhaps most of all, a combination of the 2008 housing bust and ever-tightening zoning restrictions mean that we have a huge shortage of housing.
In 1960, there were about 180 million Americans, and about 1.2 million houses were built. There are now roughly 330 million Americans—the population has almost doubled in 61 years—and we’re making only a million new houses a year. And this was the highest pace since 2007. To take an extreme example, California had fewer than 16 million people and built 190,000 houses in 1960; it has nearly 40 million people today, and builds just 120,000 houses a year. The federal mortgage company Freddie Mac estimates the current shortage of homes is 3.8 million units, or slightly more than the entire housing stock of New Jersey.
And yet…we’re still finding relative bargains in homebuilders. We’ve owned Virginiabased NVR for three years now, and though their stock has done really well (we’re up 76%), it’s still much cheaper than the rest of the market, trading at only 14.5x its next 12 months of estimated earnings compared to 22.5x for the S&P 500 as a whole. Traditionally, homebuilders have traded at a discount to the market, in large part because of their inability to convert accounting income into sweet, cold cash. Just as the culture of oil exploration demands that even the most lucrative finds are rolled back into more drilling instead of being distributed to shareholders, builders work hard to sell houses so they can buy more land.
NVR isn’t like other homebuilders. Instead of buying raw, undeveloped land and holding it for years while it’s entitled and infrastructure is built, NVR works with land developers who do this cash-intensive work for them. NVR will front 10% of the purchase price to secure an option to buy the finished land later, and they’ll pay a somewhat higher price for it upon completion. It’s more than worth it. A typical homebuilder will convert only half of its net income into free cash flow, while NVR will convert close to all of it, effectively doubling the value of a dollar of earnings.”
Based on our calculations, NVR, Inc. (NYSE: NVR) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. NVR was in 28 hedge fund portfolios at the end of the first half of 2021, compared to 39 funds in the previous quarter. NVR, Inc. (NYSE: NVR) delivered a -0.06% return in the past 3 months.
Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 115 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.
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Disclosure: None. This article is originally published at Insider Monkey.
