Ensemble Capital, an independently-owned investment firm, recently published its first-quarter Ensemble Fund commentary – a copy of which can be downloaded here. During the first quarter of 2020, the Ensemble Fund returned -18.6%, while the benchmark S&P 500 was down 19.6%.
In the said letter, Ensemble Capital highlighted a few stocks and NVR Inc (NYSE:NVR) is one of them. NVR is a company engaged in home construction. Year-to-date, NVR stock lost 19.6% and on May 4th it had a closing price of $3062.68. Its market cap is of $11.25 billion. Here is what Ensemble Capital said:
“NVR, Inc (4.2% weight in portfolio): We previously wrote about our interest in finding idiosyncratic businesses, or companies that aren’t easily compared to others. NVR is one such company. While it is a homebuilder and is impacted by macroeconomic trends in housing, it has a unique culture and business model that is primed to not only survive near-term shocks, but thrive on the other side.
Most homebuilders started as land developers and later got into homebuilding. As such, land development is in most homebuilders’ DNA. Owning and developing land has its benefits, especially in boom-times when land values are appreciating, and property is scarce. This works both ways, however, and as we saw during the housing crisis in 2008/2009, land-heavy homebuilders are often forced to write-down land values and some go out of business. In fact, the largest homebuilders were more land-heavy going into the COVID downturn than they were in the years leading up to the housing crisis.
Rather than owning land, NVR’s long-time strategy has been to option its land, providing it with more financial flexibility when times get tough. Further, NVR had over $500 million of net cash at year-end 2019. During the housing crisis, NVR expanded into new territories and in the coming quarters we expect management to once again capitalize on opportunities to both expand and consolidate share of key markets.
When the market gets concerned about homebuilding, NVR often gets thrown out with the bathwater and we believe this has been occurring again. Going into the economic pause, there were several strong tailwinds supporting new home builds, including the largest cohorts of millennials moving into household formation and prime earning years, a lack of existing home inventory, low mortgage rates, and low unemployment. Indeed, in February, monthly new home sales hit their second-highest level in 12 years. Though unemployment is a big question mark over the next few quarters, the demographic, existing home inventory, and low interest rate tailwinds remain in place. In fact, the rise of remote work during COVID quarantine may be another tailwind for new home sales (which are typically in suburban and exurban areas) as more workers may find they do not have to live close to companies’ urban headquarters to do their job.”
In Q4 2019, the number of bullish hedge fund positions on NVR stock decreased by about 21% from the previous quarter (see the chart here).
Disclosure: None. This article is originally published at Insider Monkey.
