While the COVID-19 pandemic has caused significant economic disruption and led to increased stock market volatility, it has also created more opportunities for fundamental bottom-up stock pickers like Bridgeport. This is because the initial decline in the stock market in the first quarter of 2020 and its subsequent recovery has been particularly uneven with some stocks increasing significantly in price, while other less prominent companies lag. One company that falls into the latter category is NVR, Inc. Bridgeport established a position in the stock in our Bridgeport Small & Mid Cap Equity Fund in May when it had declined 20% from its previous high in mid-February.
NVR is a U.S. homebuilder with a US$12 billion market capitalization whose primary business is the construction and sale of single-family detached homes. What makes NVR unique in the homebuilding industry is their strategy with respect to land development. Simply put, they don’t really do it. Rather, after contracting to build a home, they exercise an option to acquire a finished building lot from a land developer. This approach avoids the risks associated with raw land development and related capital requirements which can be onerous. NVR’s “capital-light” business strategy enables it to generate outstanding returns on invested capital relative to competitors.
In addition to its appealing business model, we expect NVR to benefit from several building industry tailwinds. First, after the great financial crisis of 2008/09, the combination of stricter mortgage rules and consolidation of homebuilders led to lower housing starts that only recently returned to multi-decade average levels. Within the context of this constrained supply, household formations have been steadily increasing as the millennial generation begins to enter their 30s which will be their prime home buying years. This is significant from a demographic perspective because the millennial generation is as large as the Baby-Boomer cohort. The impact of these supply and demand factors is expected to lead to a strong environment for homebuilders.
NVR also checks many important investment boxes including a strong track record of revenue growth, no net debt, a history of returning capital to shareholders via share repurchases and an attractive valuation based on earnings. While it is difficult to predict the continuing impact of COVID-19 on the short-term economy and NVR itself, we believe those willing to look beyond near-term results and maintain a long term focus on investing in quality businesses which have a demonstrated history of compounding earnings will be rewarded.