One position currently makes up over a third of assets under management at David Einhorn (Trades, Portfolio)'s Greenlight Capital.
This holding has featured in the portfolio since the fourth quarter of 2014. However, the stock went nowhere until the first quarter of 2020. It has since surged in value, rising more than 150% since the beginning of the year.
The company in question is Green Brick Partners (GRBK, Financial), and it is a great example of why sticking with good companies can pay off in the long-term.
A long-term investment
As noted above, Einhorn first started buying the stock in the fourth quarter of 2014. By the end of the second quarter of 2015, he owned just over 24 million shares, with an average price of around $10 per share. For the next few years, the home building and land development company's market capitalization stayed relatively constant. It has since risen to a high of $25.
To understand why, we can take a look at Einhorn's investor correspondence. At the beginning of this year, he highlighted the company's success. In the hedge fund's full-year 2019 letter to investors, the fund manager reported:
"Green Brick has more than tripled its revenue since going public in 2014, while maintaining industry-leading high margins and low debt-to-capital. It has achieved this via organic growth, accretive acquisitions, launching its internal brand (Trophy Signature Homes), starting title and mortgage subsidiaries, and reducing its costs through national account contracts available to it as a function of Green Brick's scale. Management is disciplined and resourceful."
It seems the stock price failed to reflect this impressive operational performance between 2014 and the end of 2019.
This appears to be a great example of value investing based on the fundamentals. Green Brick's fundamentals improved dramatically between 2014 and 2019, but the market failed to reflect that.
This has changed in 2020. As Einhorn explained in his third-quarter letter to investors:
"Housing appears to be a major beneficiary from the pandemic, as low interest rates combined with an expanded preference for single-family detached housing has spurred demand. Green Brick is well-positioned in secularly growing markets including Dallas, Atlanta, Colorado Springs and Vero Beach. In the second quarter, the company earned $0.66 per share, shattering consensus estimates of $0.42. The company's record backlog and strong order rate bode well for future earnings. Current consensus of $1.88 per share this year suggests EPS growth of over 60% year-over-year."
A few days ago, I wrote an article about Norbert Lou. In it, I highlighted the track record of this investment manager, who only owned a few positions in his portfolio at any one time. Over the past two decades, he has been able to outperform the market by buying select stocks and holding on for the long-term.
I see similarities in Einhorn's Green Brick trade. The value investor found a fundamentally cheap business and held on, waiting for the market to reward him for his patience. The stock's return since has more than compensated the investor. I calculate that if he sold at today's level, the CAGR would be in the region of 24%. That's not bad for five years of waiting.
As with Lou, Einhorn's patience has paid off. This is an excellent example of why fundamental investing can be more lucrative than passive investing in the long term. It takes more time and effort, but as these fund managers have shown, hard work is rewarded in the long run. It just takes time to find the right opportunities. When these opportunities arise, it can pay to act quickly and with conviction, as both Einhorn and Lou have shown.
Disclosure: The author owns no share mentioned.
Read more here:
- Why Does Seth Klarman Like Pershing Square Tontine?
- Lessons From Berkshire's Barrick Gold Sale
- Norbert Lou: The Best Fund Manager You've Never Heard Of
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