Should I Avoid NVR, Inc. (NVR)?

How do you pick the next stock to invest in? One way would be to spend days of research browsing through thousands of publicly traded companies. However, an easier way is to look at the stocks that smart money investors are collectively bullish on. Hedge funds and other institutional investors usually invest large amounts of capital and have to conduct due diligence while choosing their next pick. They don’t always get it right, but, on average, their stock picks historically generated strong returns after adjusting for known risk factors. With this in mind, let’s take a look at the recent hedge fund activity surrounding NVR, Inc. (NYSE:NVR).

Is NVR, Inc. (NYSE:NVR) going to take off soon? The best stock pickers were turning less bullish. The number of bullish hedge fund bets shrunk by 7 in recent months. NVR, Inc. (NYSE:NVR) was in 39 hedge funds’ portfolios at the end of the first quarter of 2021. The all time high for this statistic is 46. Our calculations also showed that NVR isn’t among the 30 most popular stocks among hedge funds (click for Q1 rankings).

So, why do we pay attention to hedge fund sentiment before making any investment decisions? 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 more than 115 percentage points since March 2017 (see the details here). We have been able to outperform the passive index funds by tracking the moves of corporate insiders and hedge funds, and we believe small investors can benefit a lot from reading hedge fund investor letters and 13F filings.

John Armitage of Egerton Capital

At Insider Monkey, we scour multiple sources to uncover the next great investment idea. For example, lithium mining is one of the fastest growing industries right now, so we are checking out stock pitches like this emerging lithium stock. We go through lists like the 10 best battery stocks to pick the next Tesla that will deliver a 10x return. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. You can subscribe to our free daily newsletter on our homepage. Now let’s take a glance at the key hedge fund action surrounding NVR, Inc. (NYSE:NVR).

Do Hedge Funds Think NVR Is A Good Stock To Buy Now?

Heading into the second quarter of 2021, a total of 39 of the hedge funds tracked by Insider Monkey were long this stock, a change of -15% from the fourth quarter of 2020. The graph below displays the number of hedge funds with bullish position in NVR over the last 23 quarters. So, let’s examine which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

Among these funds, Diamond Hill Capital held the most valuable stake in NVR, Inc. (NYSE:NVR), which was worth $538.5 million at the end of the fourth quarter. On the second spot was Egerton Capital Limited which amassed $110.9 million worth of shares. Impala Asset Management, Giverny Capital, and Renaissance Technologies were also very fond of the stock, becoming one of the largest hedge fund holders of the company. In terms of the portfolio weights assigned to each position Manor Road Capital Partners allocated the biggest weight to NVR, Inc. (NYSE:NVR), around 6.12% of its 13F portfolio. Guardian Point Capital is also relatively very bullish on the stock, setting aside 5.91 percent of its 13F equity portfolio to NVR.

Seeing as NVR, Inc. (NYSE:NVR) has experienced a decline in interest from the smart money, it’s easy to see that there was a specific group of money managers who were dropping their full holdings by the end of the first quarter. Interestingly, Richard Gerson and Navroz D. Udwadia’s Falcon Edge Capital said goodbye to the largest position of the “upper crust” of funds tracked by Insider Monkey, totaling about $36.1 million in stock. Louis Bacon’s fund, Moore Global Investments, also cut its stock, about $6.5 million worth. These bearish behaviors are important to note, as total hedge fund interest dropped by 7 funds by the end of the first quarter.

Let’s check out hedge fund activity in other stocks similar to NVR, Inc. (NYSE:NVR). These stocks are Citrix Systems, Inc. (NASDAQ:CTXS), L Brands Inc (NYSE:LB), Insulet Corporation (NASDAQ:PODD), Tyler Technologies, Inc. (NYSE:TYL), TransUnion (NYSE:TRU), Wheaton Precious Metals Corp. (NYSE:WPM), and ON Semiconductor Corporation (NASDAQ:ON). This group of stocks’ market caps match NVR’s market cap.

View table here if you experience formatting issues.

As you can see these stocks had an average of 36.6 hedge funds with bullish positions and the average amount invested in these stocks was $1807 million. That figure was $1261 million in NVR’s case. L Brands Inc (NYSE:LB) is the most popular stock in this table. On the other hand Citrix Systems, Inc. (NASDAQ:CTXS) is the least popular one with only 20 bullish hedge fund positions. NVR, Inc. (NYSE:NVR) is not the most popular stock in this group but hedge fund interest is still above average. Our overall hedge fund sentiment score for NVR is 47.8. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. This is a slightly positive signal but we’d rather spend our time researching stocks that hedge funds are piling on. Our calculations showed that top 5 most popular stocks among hedge funds returned 95.8% in 2019 and 2020, and outperformed the S&P 500 ETF (SPY) by 40 percentage points. These stocks gained 19.3% in 2021 through June 25th and beat the market again by 4.8 percentage points. Unfortunately NVR wasn’t nearly as popular as these 5 stocks and hedge funds that were betting on NVR were disappointed as the stock returned 2.8% since the end of March (through 6/25) and underperformed the market. If you are interested in investing in large cap stocks with huge upside potential, you should check out the top 5 most popular stocks among hedge funds as many of these stocks already outperformed the market since 2019.

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Disclosure: None. This article was originally published at Insider Monkey.

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