Argosy Investors, an investment management firm, published its third-quarter 2021 investor letter – a copy of which can be downloaded here. For the third quarter of 2021, the fund’s year-to-date 2021 performance was 17.1% in select accounts, while S&P 500 by comparison returned 15.9% for the same period. You can take a look at the fund’s top 5 holdings to have an idea about their best picks for 2021.
Argosy Investors, in its Q3 2021 investor letter, mentioned Dream Finders Homes, Inc. (NASDAQ: DFH) and discussed its stance on the firm. Dream Finders Homes, Inc. is a Greenwich, Connecticut-based global contract logistics company with a $1.6 billion market capitalization. DFH delivered a 9.14% and it closed at $103.03 per share on November 22, 2021.
Here is what Argosy Investors has to say about Dream Finders Homes, Inc. in its Q3 2021 investor letter:
“DFH, like Grocery Outlet below, was down over 30% since our first purchases during the first quarter of this year. Their stock price declined significantly due to a large shareholder, Boston Omaha, offloading almost 10% of the publicly-traded shares of DFH in a short period of time. This was unexpected because Boston Omaha presents itself to public markets as a patient long-term investor, like Warren Buffett. In fact, one of the two principals of Boston Omaha is directly related to the Oracle of Omaha.
The timing was curious as well because DFH announced a fairly large acquisition around the time that Boston Omaha’s share sales began. Some could interpret this pattern as a lack of confidence in the acquisition, but it is equally plausible that Boston Omaha sold DFH shares to generate cash to fund its other investments, particularly funding their recently-announced SPAC deal, leaving us an opportunity to acquire shares at an attractive price. Importantly, so far the founder and CEO of DFH has elected not to sell any of his shares, even though he is now allowed to.
The acquisition of McGuyer Homes, doing business as Coventry Homes in Texas, for $475 million is a big deal for DFH. It was funded with cash on hand and $150 million of preferred stock paying dividends at a 9% rate. DFH agreed to pay additional money to McGuyer if they achieve certain thresholds, which gives us insight into DFH’s expectations for the business, as well as earnings levels the sellers of McGuyer believe are reasonable to hit. For 2022, the earn-out threshold is $66 million. Below that amount, DFH owes the sellers nothing. If McGuyer is able to hit this threshold, then DFH is paying 7x pre-tax income for these assets in the fast-growing Austin, TX market.
The other important element to this deal is that DFH structured the transaction so that they remain an asset-light homebuilder. McGuyer’s sellers will retain $100 million in real estate inventory, and DFH has the option to purchase that inventory over the next 2 years. I have to believe that many homebuilders would be reticent to agree to such terms, so while some in the market may view this deal negatively, I believe DFH is being disciplined in pursuing this deal. We will just have to see as the future unfolds.
Given the additional earnings from the McGuyer assets, I believe that DFH is now capable of producing >$2 in earnings in 2022. Obviously, interest rates, raw material prices, labor availability, and other factors could impact their ability to deliver this result, but I think that DFH could be worth ~$30 based on 2022 earnings, nearly 100% higher than recent prices. Future growth could justify prices above $50 over the next several years.”
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Based on our calculations, Dream Finders Homes, Inc. (NASDAQ: DFH) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. DFH was in 5 hedge fund portfolios at the end of the third quarter of 2021, compared to 7 funds in the previous quarter. Dream Finders Homes, Inc. (NASDAQ: DFH) delivered a -17.84% return in the past 3 months.
Disclosure: None. This article is originally published at Insider Monkey.
