David Einhorn is known for his big bets. It's a strategy that helped make him a billionaire. One of his largest bets right now is Green Brick Partners (GRBK +0.69%). Einhorn's investment company owns more than 11 million shares, representing 29% of his total portfolio.
Should you follow Einhorn into one of his biggest bets ever?
NYSE: GRBK
Key Data Points
1 reason Einhorn loves Green Brick stock
Green Brick has been part of Einhorn's portfolio for a long time. He's owned shares for nearly two decades, and is currently Chairman of the company's board of directors. "We believe in constructing the portfolio so that we put our biggest amount of money in our highest-conviction idea," Einhorn once explained in an interview. It's fair to say, then, that Green Brick is one of his top conviction ideas.
What exactly does Einhorn love about Green Brick? The biggest thing is that, just like Einhorn's own investing strategy, Green Brick believes only in long-term results. The company is even willing to shoulder short-term pain if that means generating hefty returns for shareholders over the long run.
Consider the company's business model. At first glance, Green Brick looks like a development business. It acquires land and then builds homes, often providing the financing to make the final home purchase possible. Green Brick's true business model, however, is arbitrage. That is, Green Brick is exploiting a gap in the market created by slow shifts in supply and demand.
Decades ago, the company was essentially founded on a belief that single-family homes were an undervalued asset class. Huge sums of money were invested in other real estate categories like large commercial, office, retail, and industrial properties. But single-family homes were a relatively ignored asset class, at least apart from the trading of mortgage securities.
Green Brick believed it could capitalize on this opportunity by getting involved in development directly. It was a rough start. Shortly after the stock went public, the U.S. real estate market collapsed, sending the share price cratering.
Lately, however, Green Brick stock has performed quite well. Over the past five years, shares have risen nearly 500% in value. Why? Because Green Brick stuck to its long-term strategy. Housing cycles move slowly. In 1995, for example, the U.S. housing inventory was at a multi-year low. It took until 2005 for inventory levels to move above long-term averages. A few years later, inventory was near all-time highs, partially contributing to the real estate collapse of 2007 and 2008. It has taken more than 15 years, but right now, housing inventory has returned to all-time lows. New inventory from companies like Green Brick is coming online, but it will take many years for things to rebalance.
In the meantime, Green Brick is generating some of the best returns in its history. Sales are up 70% year over year, the highest growth rate of any small to medium sized homebuilder. Its gross margins last year surpassed 30%, a figure that also puts Green Brick near the top of the industry. In metro areas that Green Brick is focused on -- namely Dallas, Houston, and Atlanta -- populations, employment, and incomes are all on the rise, with housing demand following suit.
Green Brick struggled in its earlier years, but its long-term vision is finally paying off. Einhorn has maintained his position through it all, but there's some recent news investors should be aware of.
Source: Green Brick Partners Q4 Earnings Presentation.
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Green Brick has a promising future. It has recently accumulated a strong track record of performance. Its areas of focus, meanwhile, should experience a multi-year runway of growth thanks to strong demographic tailwinds and limited housing stock. Einhorn, for his part, is still all-in on the company, retaining a huge stake and his position on the board.
But there's one other thing you should know: Einhorn has recently begun to lower his stake in Green Brick. Since September 2023, he has trimmed his stake three times, from 13.2 million shares to 11.3 million shares. Much of this likely has to do with the company's soaring stock price. A decade ago, for example, Green Brick shares traded at book value. Today, shares trade at nearly double book value. It makes sense for Einhorn to harvest some of his long-term gains to redeploy into other positions, especially since Green Brick now commands such a huge percentage of his portfolio. But it's never promising when a major investor, especially a member of the board of directors, begins to sell company stock.
Does Einhorn still believe in Green Brick? Of course, otherwise he would be unwinding his stake much more quickly. But are shares a screaming buy? Einhorn's recent sales indicate that he likely doesn't believe so.
