Green Brick Partners: A Bullish Setup In The Making (NYSE:GRBK)

Dallas Suburban Houses

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“My buttons, my buttons, my four groovy buttons. Aah! One of the buttons popped off and rolled away. But did Pete Cry? Goodness no. Buttons come and buttons go. He kept on singing his song…my buttons, my buttons, my three groovy buttons…I guess it goes to show that stuff will come and stuff will go, but do we cry? Goodness no. We just keep on singing.”

– Pete the Cat and His Four Groovy Buttons.

Right now strikes me as a critical moment in time to take pause and consider for a moment that when the market fluctuates somewhat dramatically that a better approach vs. joining the panic could in fact be to formulate an action plan now for how you intend to react if/when the turbulence strikes. After all, what feels like the end of days could simply turn out to be a single button popping off…but that is no reason to lose your shirt. In Howard Mark’s book The Most Important Thing, he states “You can’t predict, you can prepare”. For example, it is probably a good time to create a shopping list of what stocks you would like to buy given an outsized opportunity in the midst of a short-term aberration. This could help you get into a better head space to make some decisions that stand a decent chance of paying off in the long run vs. joining in on some panic selling in the short run. For me, I am personally becoming re-interested in adding to homebuilders and housing related stocks…largely because I believe volatility in the interest rate markets are on the verge of becoming a catalyst for compelling values across the homebuilding/housing related equity space.

This is speculation on my part but I believe there is a real possibility that the market may be setting itself up to grossly overreact to the potential impact of interest rates increases. I suspect there are enough weak hands out there and enough programmatic trading (probably designed to spook the weak hands for profit) that homebuilders/housing related stocks could get irrationally beaten down as mortgage rates lift off from THE historic low only to become…low by historical standards. My perception is that the marginal price setters in this market seem to key-off super short term incremental changes as the only thing that matters when assessing value. In my view this approach is likely to equate a single piece of bark falling off a tree with the entire forest falling over.

Mortgage rates, while important, are not what I would argue is likely to propel the housing market forward over the next 3-10 years. There are bigger forces at play in my opinion. I would argue that whether there are 3 rate increases or 4 rate increases is practically speaking…irrelevant. Even after 4-quarter point rate increases, I suspect mortgage rates will be cheap by historical standards. Practically speaking, the incremental difference of three vs. four rate hikes vs. no hikes at all will have on a young couple ready to move out of an apartment to plant some roots is literally the equivalent of eating out one less time per month and maybe, just maybe…two fewer fancy coffee and avocado toast breakfasts per month – Heaven forbid! And Suzie Orman would probably say they shouldn’t be doing that anyways…DENIED.

Nonetheless, I can just see the headlines now, “mortgage applications down X% as mortgage rates up 30%!”. Can you see it? In mere nanoseconds billions and billions of dollars of market cap from homebuilders and housing related stocks could be eradicated (temporarily in my view) for a short period of time. Sure…mortgage rates will end up at all of 4% or 4.5% vs. the historic low of something 2.5-2.75%…but that just isn’t as sensational sounding as mortgage rates up 30% and thus won’t grab the headlines and clicks quite the same way. Nope. It has to sound like doomsday or it doesn’t get run. Good, bad, or indifferent, the headline is targeted to solicit a reaction!

I personally believe this scenario sets up a terrific opportunity. Sure the housing market may moderate a bit as a result of losing some of the, dare I say, reckless amount of stimulus being pushed into the economy. But to my mind that means going from a searing white hot housing market to a more moderate rolling boil or maybe (in a more bearish rate normalization scenario) to a braising simmer hot…but let’s be reasonable people, that is still pretty hot. And that is not something worth losing your lunch over. The better play, at least in my estimation, is to pick your spots where the odds seem almost oddly in your favor and wait and hope for a panicky selloff for prices to fall to that level. You may not be able to judge success in a week or a month or even 6 months. But give it some time and perhaps you will see that buying when the market freaked the heck out over 100 basis points turned out to be a great decision.

Take for instance Green Brick Partners (GRBK). It’s a small homebuilder with the majority of their operations in a few select areas – largely DFW followed by Atlanta and some modest operations in FL and CO.

Price Chart

Price Chart

Seeking Alpha

Since I last wrote about GRBK, the company posted 3Q figures and top and bottom line figures were certainly great. On a y/y comparison of Q3 2021 vs. Q3 2020, revenue was up 24%, operating income was up 48% and net income was up nearly 40% – all of which is fairly sporty to me…I don’t care what professional analysts were estimating. On a TTM basis, GRBK is trading for 8.4x earnings and per Seeking Alpha data the P/E FY3 ratio is a mere 5.7x. The shares when I last wrote about GRBK were in mid-$20’s and subsequently dropped to the low $20’s before trading up to a 52-week high of $32.25. Since mid-December GRBK has dropped close to 20% – which I believe is almost entirely due to the fact that the Federal Reserve shifted their narrative away from “transitory” inflation to concerned that inflation may in fact be a bit more structural in nature and as such perhaps it may be time to ease up off the monetary throttle – which has been completely and aimlessly pinned for years at this point.

In any case, is a little jaw boning on rates – which I believe could equate to potentially impacting the equivalent of one dinner and maybe two avocado toast breakfasts out per month – worth knocking 18% of the market cap off GRBK? I personally think that is a bit overdone. But I honestly wouldn’t be surprised if there is more to come. The Fed has only been talking about backing off the fully pinned monetary throttle…they haven’t actually done anything yet…and shares of GRBK are off nearly 20%. If my theory does play out and shares of Green Brick drop back into the $20/23 per share range, I personally think that is weakness worth buying. Think about it…rates are rising because inflation is on the run…and what does GRBK have as a strategic advantage over its competition? A huge and growing position on land.

Land acquisition over time

Green Brick Investor Relations

Isn’t that an embedded inflation hedge worth considering? An inflation hedge with strong gross margins and a conservative balance sheet operating in specific markets experiencing a massive influx of migration no less. At a forward multiple of sub-6x in an overall market of >20x, I am left hoping for an opportunity to add to GRBK at what I personally view to be a compelling price relative to what I view as its intrinsic value in the coming weeks and months ahead. When you feel the urge to do something urgently, almost in a panic, because one point of support disappears…take pause for a moment to reflect on Pete the Cat and His Four Groovy Buttons. Buttons come and buttons go, but do we cry? Goodness no.

Thanks for reading.

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