Wednesday, July 28, 2021

New Home Buyout

Three years ago, I discussed The New Home Company as a potential value stock. Last week, the company announced that it has accepted a buyout offer.

It's no secret that the housing market is hot, so a lot of trend-followers continue to allocate capital to this sector. I was buying housing stocks when nobody wanted them, so in general I'm happy to sell out and deploy that capital to the current unpopular sector(s).

Over the last three years, the return on NWHM isn't out of this world or anything: a respectable 60% or so, which annualizes to 17% per year. But there are a couple of factors here that understate the value of this investment.

First, the downside risk was pretty minimal. Debt wasn't due for a long time, and so at a huge discount to historical cost, the downside was well-covered by housing inventory and other assets.

Second, the volatility in this stock has provided a ton of opportunities for even greater returns. For example, since the depths of the virus-induced stock market sell-off, NWHM is a staggering 9-bagger! I did add to my position on that sell-off, but in hindsight not nearly enough.

I'm not entirely convinced the buy-out offer is totally fair. Book value is still a couple of bucks higher. But insiders own almost 30% of this thing, and if they are willing to sell, maybe the price is fair enough.

Disclosure: Author has a long position in shares of NWHM

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