In an article a few weeks back, I questioned whether the homebuilders have become bargain investments. Most of the big names -- including Pulte (NYSE: PHM ) , D.R. Horton (NYSE: DHI ) , and Centex (NYSE: CTX ) -- are currently trading at a fraction of their stated book value. Is there an opportunity emerging in this sector for the patient long-term investor?
Perhaps. But I also spoke of NVR (AMEX: NVR ) , another homebuilder that has felt some pain but appeared to be in better shape than some of its rivals. The first positive sign was that NVR was still profitable while just about all of the other homebuilders were bleeding money. NVR's management seems to have a conservative approach, too. The company has a debt-to-equity ratio of about 27%, and buybacks have lowered shares outstanding from 11 million in 1997 to just above 5 million today. Finally, NVR's level of land exposure relative to its size is a lot less than those of its peers, so the company hasn't been as badly affected by land write-offs. As a result, NVR continues to trade at a premium to book value.
Eating his own cooking?
If the activity of senior executives offers any indication of a company's future prospects, then NVR might be the exception to the bad news in this housing meltdown. Earlier this month, founder and Chairman Dwight Schar purchased $52.4 million worth of NVR shares in the open market. Following that purchase -- the largest on record by an NVR insider -- Schar now owns approximately 8% of the shares outstanding.
Schar's purchase came six months after he sold 259,193 shares for $211 million, or an average price of about $815 each. While the recent purchase was surely made with profits from the earlier sale, Schar's willingness to buy again so quickly appears to indicate a favorable future for NVR. An SEC rule known as the short-swing profit rule required Schar to wait six months from his date of sale before he could make a purchase, and his purchasing began on the first market day after the ban was lifted.
So it sounds as if there may be hope for this homebuilder. But I haven't heard about any such bullish moves from any of the other homebuilders. To be fair, Toll Brothers (NYSE: TOL ) founder Robert Toll already holds a substantial stake in his company, although he did sell a bit in the past year or so.
Still, whatever hope lies ahead is still a few years away. I wouldn't expect to see NVR trading above $800 anytime soon. But if NVR's stock price were to reach that level in four years or so, you'd have an annualized rate of return of 14%. Not too shabby.
In my aforementioned article, I said I would want a greater margin of safety before investing in NVR, and I mentioned that if it ever traded at book value, the investment opportunity would become enticing. To get to that point, NVR would have to sell for around $200 a share, or more than 50% lower than Schar's purchase price. While nothing's out of reach in this market environment, sometimes an insider's purchase -- i.e., consciously putting more skin in the game -- can increase your margin of safety in lieu of a lower buying price. Given NVR's solid balance sheet, conservative management, continuing profitability, and recent insider buying, patient long-term investors might want put this business on deck for an investment.
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