Greenlight Capital, an investment management firm, published its “Global Growth Fund” second quarter 2021 investor letter – a copy of which can be downloaded here. A quarterly return of -2.9% was recorded by the fund for the second quarter of 2021, compared to 8.5% for its e S&P 500 benchmark. You can view the fund’s top 5 holdings to have an idea about their top bets for 2021.
In the Q2 2021 investor letter of Greenlight Capital, the fund mentioned Green Brick Partners, Inc. (NASDAQ: GRBK), and discussed its stance on the firm. Green Brick Partners, Inc. is a Plano, Texas-based operative builders operation company, that currently has a $1.2 billion market capitalization. GRBK delivered a 9.19% return since the beginning of the year, extending its 12-month returns to 81.67%. The stock closed at $25.07 per share on July 30, 2021.
Here is what Greenlight Capital has to say about Green Brick Partners, Inc. in its Q2 2021 investor letter:
“Single Family Detached Housing
From 1960 through 2002, an average of 1.1 million single family homes were constructed in the U.S. per year. During the bubble years of 2003 to 2007, that grew to an average of 1.5 million. So, if average demand is 1.1 million, an extra 2 million houses were constructed over those 5 years. It was a bubble.
Post-GFC, construction has averaged just 700,000 new homes a year. Over a dozen years, the reduced construction helped absorb the 2 million extra houses and created a housing deficit of a similar amount, assuming no long-term change in the demand for single-family housing despite a growing population.
COVID exposed the shortfall. Average house prices are up about 20% year-over-year and there are record low inventories. It will be difficult for the industry to catch up. First, zoning and land development have become much more difficult, time-consuming and expensive. Second, land developers and homebuilders are not being showered with cheap equity capital to expand rapidly to take advantage of strong market conditions and reverse the shortfall. In fact, on a national basis, there are 17% fewer active homebuilding subdivisions than there were a year ago.
While many investors are worried that demand will wane and home prices will fall, as evidenced by awarding builders single digit P/E multiples on earnings estimates that are likely to be dramatically exceeded, we think it is much more likely that the inability to satisfy demand will persist and lead to even higher prices…
…We haven’t even begun the process of higher home prices begetting additional demand as homeowners commence cash-out refinancing and use the appreciation from existing homes to move into more expensive homes. Rising prices will also attract current renters, who come around again to the notion that owning a home is an attractive lifetime investment. Further, we expect the Biden Administration to possibly turbocharge an already tight market by attempting to expand home ownership opportunities.
A small tweak in monetary policy isn’t going to resolve the decade-long underinvestment in housing. Green Brick Partners (GRBK), our largest investment, is poised to benefit from this dynamic. It trades at around 7x this year’s consensus earnings estimates.”
Photo by Scott Blake on Unsplash
Based on our calculations, Green Brick Partners, Inc. (NASDAQ: GRBK) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. GRBK was in 18 hedge fund portfolios at the end of the first quarter of 2021, compared to 12 funds in the fourth quarter of 2020. Green Brick Partners, Inc. (NASDAQ: GRBK) delivered a -2.87% 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.
