NVR (NVR -0.43%) isn't exactly a household name, but maybe it should be -- at least among stock investors. The homebuilder has one of the best long-term track records of returns in the entire stock market, and has done so without being a particularly innovative or tech-focused business.
However, although NVR's returns so far have been simply fantastic, there's a solid argument to be made that the stock is still rather cheap. Here's why.
NVR's fantastic track record
As mentioned, NVR is a homebuilder. The company is based in Reston, Virginia, and operates in more than a dozen states and D.C., mostly on the East Coast. While NVR isn't exactly a household name, its subsidiary brands -- especially Ryan Homes -- are among the most widely known names in homebuilding in their markets.
Based on the number of homes sold, NVR is the fourth-largest builder in the United States. In the second quarter of 2023 alone, NVR received new orders for more than 5,900 new homes.
To be fair, NVR's track record isn't a flawless one. It was founded in 1980 as NVHomes. (Note: The "NV" stands for Northern Virginia, and the R was added for the 1986 acquisition of Ryan Homes.) As a result of a recession in the early 1990s, NVR filed for bankruptcy in 1992, and once again became a public company in late 1993.
However, since that time, the company's execution has been fantastic, especially when it comes to capital allocation, which we'll get into. But the numbers tell the story.
In the 30 years since it emerged from bankruptcy and became a publicly traded company, NVR has produced 61,100% total returns for investors. That's not a typo. This means that a $10,000 investment in NVR 30 years ago would be worth more than $6.1 million today. That is an annualized return of nearly 24%.
A unique model and smart capital allocation
NVR's secret sauce has been its land-light homebuilding model. Most big homebuilders are heavily engaged in land development. They'll buy a large tract of land, develop it into a neighborhood, and sell building lots incrementally as people buy homes.
NVR does things differently. It typically doesn't buy any land until it's ready to start building a home for a customer. Instead, it buys lot purchase agreements (LPAs) that give the company the option to purchase lots in exchange for a small, nonrefundable deposit. In you're familiar with options investing, think of these LPAs as call options on land.
The point is that this method requires far less capital than the traditional land development model to achieve the same product volume. This has historically resulted in best-in-class returns on equity, and more available capital to invest elsewhere.
Because of this ultra-profitable model, NVR has used a ton of excess capital to buy back shares. In 30 years, the company has bought back a staggering 82% of its outstanding shares, and its board just authorized another $500 million in buybacks.
Some big catalysts for homebuilders
Homebuilders have been surprisingly strong in 2023. While the real estate market is extremely slow, it has actually created conditions that are quite favorable for homebuilders.
Here's the simple version: Many would-be homebuyers are staying on the sidelines. Rising home prices and spiking mortgage rates have made homeownership much less affordable. But some people still need to buy homes. For example, families could be relocated for jobs and renting isn't a good option.
And while many homebuyers have stayed on the sidelines, more would-be sellers are doing the same. Millions of U.S. homeowners have mortgage interest rates of 4%, 3%, or even less and don't want to give them up by selling. Existing home inventories are sitting at a generational low, which has led more people looking for homes to builders. New home sales make up 33% of all homes listed for sale in the U.S. -- over the past two decades, this share has averaged just 13%.
Still cheap after such big gains
Even after its phenomenal long-term performance and 35% year-to-date gain, NVR looks very attractive, trading for less than 14 times forward earnings.
There's quite a bit of room for growth. Although the environment for homebuilders is better than expected, we could see business pick up sharply if interest rates fall in the years ahead. Plus, there's an estimated shortage of about 4 million homes in the United States, and homebuilders like NVR are likely to be a big part of the solution.
To be sure, NVR isn't the cheapest homebuilder in the market -- far from it, actually. But you get what you pay for.
