Value investors live and die in cycles. In high growth cycles, their returns often lag the market for years at a time. Once the market trend turns and stock prices start to go down, value investors pounce.
The investors we're going to look at today have become billionaires thanks to years of "buying when there's blood in the streets."
Let's go over what high-profile investors Joel Greenblatt, Glenn Greenberg, and Tom Gayner may like about the real estate stocks they've recently bought into: Howard Hughes Corp. (HHH -0.79%), D.R. Horton (DHI -2.53%), Lennar Corp (LEN -1.51%), and CoStar Group (CSGP 0.10%).
Howard Hughes Corp.
Howard Hughes Corp. has been a popular investment among hedge fund managers since one of them, Bill Ackman, controlled its spin-off several years ago. The company purchases land and parcels plots off for sale in master planned communities (MPCs).
The company uses the initial sales to fund the development of spaces like gyms, schools, and retail areas to increase the value of the rest of the community. As more of the community is developed, values go up, and the company is able to make more money selling land parcels to developers.
Like many real estate stocks, Howard Hughes has been crushed this year. The stock is down by over 35%. Management thinks it's worth $170 per share (more than double the current price of around $67), and repurchased $250 million of stock between November 2021 and February 2022 in an attempt to drive the price up to its perceived value.
Billionaire Joel Greenblatt is well known for his "magic formula" of investing, which seeks to invest in companies with low price/earnings (P/E) ratios and high returns on equity. Howard Hughes' EV/EBITDA of 15.4 and return on equity of 23.4% fit that bill. Greenblatt purchased the stock earlier this year and has already added to his position.
D.R. Horton and Lennar Corp.
Glenn Greenberg isn't as well known as the other investors on our list, but he has outperformed the market for decades using a uniquely concentrated portfolio. D.R. Horton and Lennar Corp. are new purchases and already make up over 5% of his portfolio. Look for that number to increase over time.
Both homebuilders had strong five-year returns before being crushed in 2022. Easy money drove up home prices and revenue before increased interest rates scared investors away in 2022. The drop may have created an appetizing situation for value investors like Greenberg.
D.R. Horton's P/E of 4.84 is just over 40% of its five-year average. Even if its earnings take a hit from increased interest rates, it could still be a value buy. It also has value in its balance sheet. The current price/book (P/B) of 1.41 is below the five-year average of 2.02.
Lennar's P/E and P/B are similarly low, at 4.85 and 1.37 respectively. Like Howard Hughes, this company is buying back shares hand over fist. In October of last year, management authorized $1 billion in new share repurchases. And between December 2021 and May 2022, the company bought back $847 million of stock.
CoStar
CoStar isn't a homebuilder or MPC developer like the other companies here, but its stock has been hit almost as hard, down about 25% year to date. CoStar is a real estate tech company that has an online marketplace for commercial real estate. It is the 800-pound gorilla in commercial real estate listings online.
Tom Gayner, the CEO of value investing insurance company Markel (MKL 1.43%), is sometimes referred to as a mini-Warren Buffett, as he uses Markel's float to buy undervalued but still growing stocks. Gayner increased his position in CoStar by almost 500% in Q1 this year.
CoStar isn't traditionally undervalued. Its P/E is over 75 and its P/B is over 4. But it is a growth company and a technology one as well, so we'll need to value it differently than a homebuilder. Revenue of $2 billion over the last 12 months is double what it was in 2017, and EPS is almost triple what it was in 2017.
For growth stocks, I like to do an inverted discounted cash flow model: What level of EPS growth does a business need to have to justify the current price? For CoStar (using an 8% discount rate and 4% terminal growth rate), that number is about 17% for the next 10 years.
That's an admittedly high number. The company has grown EPS at 38% per year for the last nine years. If it can continue compounding revenue growth and increasing margins, it could turn out to be a good investment for Gayner.
