By Mat Doiron
Dwight Schar, a director at NVR, Inc. (NVR), is quite bullish on his $3.8 billion market cap company; he bought 10,000 shares of stock earlier this week at an average price of $733.22 per share. NVR, which focuses on homebuilding in the Mid-Atlantic and eastern half of the Midwest and also has a mortgage banking unit, was actually performing very well this year.
The stock was up over 20% in mid-July, but has fallen around 15% since July 16th as the company missed analysts' revenue estimates for the second quarter. Schar likely watched this drop in the stock price and, based on his knowledge of the company's operations, believed that the market had overreacted and that this had made a good entry point into NVR.
Insider buying is generally considered a bullish sign, as an individual would generally prefer to diversify their investments rather than be so concentrated in a company in which they also have professional involvement. The size of Schar's investment makes this a particularly strong buying signal.
To be more thorough, it is important to examine the Q2 results that caused the plunge in the stock price. The revenue miss was large, at 7% below analyst estimates, but still had double-digit growth compared to the previous year. Earnings per share were up over 30%, and the first quarter of the year had compared favorably to Q1 2011 as well. NVR may not have grown as strongly as analysts wished, but was still delivering. It is somewhat problematic that NVR had been, and to some degree still is, priced according to high-growth assumptions: it carries a trailing P/E of 27 and a forward P/E of 16. Looking at five year growth rates assigned by analysts, the PEG ratio is greater than 2. If the company cannot meet the growth trajectory that Wall Street analysts project, it will prove to be a poor value.
A number of hedge funds added to their stakes in NVR in the first quarter of 2012 and stand to gain if Schar's purchase turns out to be based on a good understanding of the company's future prospects. Robert Bishop's Impala Asset Management increased its position to 258,000 shares by the end of March (which, given the high price per share, represented a $187 million investment at the time). Impala had increased its stake by roughly 100,000 shares since the end of March 2011 (see other stock picks from Impala). Pennant Capital Management, run by Alan Fournier, owned 172,000 shares and had generally been increasing its holdings since initiating the position a year ago. Billionaires Ken Griffin and Richard Chilton are also bullish about the stock and increased their bets during the first quarter. On the other hand, billionaire hedge fund manager David Einhorn is also among NVR shareholders, but he reduced his stake in the company by 37% during the first quarter.
Other insiders aren't particularly bullish about NVR. Robert Goethe has been exercising his options and selling his shares at prices between $780 and $852 over the past 6 weeks. Dennis Seremet (officer), Manuel Johnson (director), and Paul Saville (officer) engaged in direct sales totaling more than $15 million in May. They sold their holdings at prices above $815 (see the details here).
NVR's peers include D.R. Horton (DHI), PulteGroup (PHM), and Ryland Group (RYL). These other homebuilding stocks however are all outperforming NVR as they are up between 50% and 70% in 2012. In addition to taking advantage of a decrease in the company's share price, Schar therefore may have believed that NVR should converge to the performance of these comparable companies. On a forward basis, all three companies have P/E multiples between 15 and 20, so in that respect NVR is square in step with them. However, D.R. Horton has the highest PEG ratio of the three peers at a whopping 5.4.
If NVR struggles to meet the growth trajectory that analysts have set for it, its peers will likely fail to meet one that has been set twice as steep. While the whole industry is priced for growth, NVR may be the cheapest lot in the neighborhood. We would consider buying into NVR and hedging with short positions in similar companies. Otherwise we don't think a 10% discount (compared to the prices that other insiders were selling) is attractive enough to initiate a naked long position.