Among the most extraordinary investments of the last decade has been Berkshire Hathaway’s bet on Apple. Not because Buffett historically had shied away from technology or anything peculiar to Tim Cook’s firm, but more so because of the size of the bet. The Cupertino-headquartered firm now represents a full 50% of his equity portfolio.
For an investor as savvy as Buffett to have allocated so much of his firepower to one single company is remarkable. In order to do so, he had an opportunity cost not only to make more elsewhere but to diversify risk across other investments. And in spite of it all, he still chose to put half of his common stock eggs in the Apple basket.
A similar type of bet was made by David Einhorn, albeit one that represented closer to one third of his portfolio versus the half that Buffett committed. And it must be said that half of Buffett’s equity portfolio is a significantly larger bet in absolute dollars (not least because Einhorn manages “just” $1.7 billion).
Regardless, Einhorn made a massive investment as a percent of his portfolio in a single company, Green Bricks Partners (NYSE:GRBK), but why?
Greenlight’s Biggest Sale Is Its Largest Holding
Last quarter, David Einhorn’s Greenlight Capital sold more of Green Bricks Partners than any other stock in its portfolio yet it still remains the fund’s largest holding.
The conundrum is explained away by the GRBK share price performance this year, a remarkable gain of 95.6%. So it seems Einhorn’s investment team wasn’t selling because it had changed its outlook on the fundamentals of the firm, so much as they aimed to lock in some of the enormous profits made from their huge bet.
That makes sense when you look a little deeper into Green Brick Partners financials and see it’s still trading at a low price-to-earnings ratio of just 8.1x.
When compared to the 15x PE ratio that Buffett is believed to favor as a line in the sand, Einhorn’s largest holding seems like a real bargain.
Why Did David Einhorn Buy Green Brick Stock?
David Einhorn appears to have bought Green Brick Partners stock based on valuation reasons. According to two analysts, GRBK share price is fairly valued at $48 per share but a discounted cash forecast analysis is much more optimistic and places intrinsic value higher at $66.06 per share, representing 36.1% upside potential.
On other profitability metrics, it’s fair to say that Green Brick is simply stunning. The company’s return on equity is 24.5% while its return on assets is 16.3% and, on the all-important, return on invested capital it has posted a 16.9% ratio.
These numbers are not to be sneezed at, particularly for a firm that is generating $1.7 billion in revenue and converting $287.5 million of that into net income. Even at its current $2.1 billion market capitalization, the homebuilder does not seem to have an elevated valuation no matter how you analyze it.
If there were one drawback, it would be that the company doesn’t have a dividend to attract income-seekers but that’s not a reason to put it on the sidelines for future consideration. Trading at just 1.3x the last twelve months sales, it remains cheap.
So what is it about Green Brick that make it so special?
5 Reasons Why Green Brick Is Winning
The standout reason for what is distinguishing Green Brick from its rivals is that it combines both homebuilding and land development into a unique business model. By so doing it can control a wider variety of aspects of the homebuilding process and thereby report higher margins and heightened quality control.
It further separates itself from larger homebuilders by building customized homes and catering to niche markets. It can attract a specific customer who is willing to pay a premium for unique features as a result. Further, the customization provides the added benefit of flexibility, whereby the company can adapt to market changes, including evolving consumer preferences and economic conditions.
Yet another reason why Green Brick has succeeded is its strategy of maintaining extensive land inventory, an approach that ensures a steady supply of building sites that are crucial in times of land scarcity.
When added to the mix, these combinations of factors have resulted in high customer satisfaction and a growing brand reputation for home quality as well as a willingness to engage Green Brick for repeat business.
So far, the company has a presence in growth markets, like Texas and Georgia, but its broad geographical reach distinguishes it from many homebuilders who are focused regionally, and indeed to some extent, a macro downturn in any single market is mitigated by the spread.
Is Green Brick Partners Stock a Buy?
Although Green Brick Partners stock has almost doubled since the start of the year, its profitability metrics suggest that there is more to go. By no means does the valuation seem elevated, even after the big run-up. It’s for that reason that Greenlight Capital is likely holding such a large stake in the firm still.
Having locked in a handsome return already, the cost basis of the remaining position is further reduced and that likely gives Einhorn and his investment team even more confidence in continuing to hold the position, large as it may be.
For new and prospective buyers, the massive percentage gain in GRBK share price this year is justifiably cause for some concern. A pullback would be natural after such a fast ramp higher, but the comfort in holding the position even then stems from a valuation analysis, in particular a discounted cash flow forecast analysis but also a combination of the firm’s return on equity, ROIC and P/E ratio.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.