Black Bear Value Partners, an investment management firm, published its first quarter 2021 investor letter – a copy of which can be downloaded here. A return of +13.6% was delivered by the fund for the first quarter of 2021, outperforming the S&P 500 Index that delivered a +4.4% return for the same period. You can view the fund’s top 5 holdings to have a peek at their top bets for 2021.
Black Bear Value Partners, in its Q1 2021 investor letter, mentioned NVR, Inc. (NYSE: NVR), and shared their insights on the company. NVR, Inc. is a Reston, Virginia-based home construction company that currently has a $17 billion market capitalization. Since the beginning of the year, NVR delivered a 15.14% return, extending its 12-month gains to 39.77%. As of June 17, 2021, the stock closed at $4,697.55 per share.
Here is what Black Bear Value Partners has to say about NVR, Inc. in its Q1 2021 investor letter:
“NVR is one of the highest-quality and largest homebuilders in the United States. While they focus on homebuilding, they also have a mortgage and title insurance business that has been contributing cashflow during this low-rate environment.
NVR has had a “land-light” strategy which means they don’t own much land. Instead they option land and when the land has been entitled and prepared for development they purchase and build the home. The typical homebuilder will buy and own land for many years during the entitlement process, tying up valuable capital in the meantime. Additionally, if the homebuilding economics get stretched, the land can plummet in value impairing one’s balance sheet. NVR does not have this problem as they are effectively a Just-In-Time developer. While the unit level economics are not too different among homebuilders, their land-light strategy results in returns on capital that are many multiples greater than their competition.
I have been attracted to businesses that appear as one thing but are really another. In this case, while NVR is a homebuilder it operates more like a capital-light distributor of homes with more focus on rapid inventory turns and associated high returns on capital…not the capital intensive/land-intensive homebuilders of the past (and somewhat of the present).
One of the less-desirable outcomes from the 2008 financial crisis has been a lack of homebuilding relative to historical levels. As millennials age, create families and desire more space, the lack of housing inventory will likely become even more pronounced providing tailwinds for the industry and specifically the best operators.
We own a best-in-class business at a 6-7% FCF yield with interesting upside optionality if the housing economy rebalances.”
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Our calculations show that NVR, Inc. (NYSE: NVR) does not belong in our list of the 30 Most Popular Stocks Among Hedge Funds. As of the end of the first quarter of 2021, NVR, Inc. was in 39 hedge fund portfolios, compared to 46 funds in the fourth quarter of 2020. NVR delivered a 6.23% 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.
