In today’s topsy-turvy market environment, there are plenty of financial indicators for ardent investors to follow. One such metric is insider trading activity. Often overlooked by armchair analysts, insider sentiment surrounding a stock is usually a good indicator of future price movement. While most selling activity is a result of stock options or profit taking, insider buying represents a far clearer signal that is almost always bullish in nature. Over the past decade, there has been a flood of empirical research – Lakonishok in 2001, Jeng in 2003, and Metrick in 2003 – that has found that, on average, investors who mimic the buying behavior of corporate insiders can beat the market by 6.4 percent a year, risk-adjusted. Aside from using tactics like these, there aren’t many strategies that can duplicate this success.
In the midst of various reports of positive housing market data, an insider at homebuilder NVR, Inc. (NYSE:NVR) has been feeling particularly bullish. The details are below for your viewing pleasure.
C. Dwight Schar: As the founder of the third-largest homebuilder in the U.S., Mr. Schar has truly placed himself among the titans of American industry, molding NVR into a multi-billion company in a little over 30 years. Pre-recession, it had been widely reported that Schar and his executive team was selling NVR stock in droves; altogether they avoided investment losses of more than 50 percent. Over the last three years, though, shares of NVR have recaptured most of their declines, crossing the $850 threshold earlier this month.
On July 25th, SEC form 4 filings showed that Mr. Schar had purchased 10,000 shares of NVR for a total value of $7.3 million. This transaction increased the executive’s total holdings in his company to 80,523 shares. In the week leading up to this purchase, the stock had lost nearly 15 percent, mainly a result of a weak Q2 data. The company’s quarterly earnings of $8.97 a share did beat the analysts’ estimates ($8.78) and Q2 2011 EPS ($6.48), but new home orders (+5.9%) rose by far less than the Street predicted (+26%), and revenues missed forecasts by 7.3 percent.
On the whole, NVR is still expected to finish 2012 with earnings of $34.20 a share, up from the $23.01 it reported in 2011. This 48.6 percent growth is forecasted to expand by 2013, with EPS estimates ranging as high as $60.93. If average consensus holds, NVR would see its yearly EPS increase by 127.3 percent over the next 24 months. In terms of raw totals, this jump would be larger than competitors like PulteGroup (NYSE: PHM), DR Horton (NYSE: DHI), Lennar Corp (NYSE: LEN), and Toll Brothers (NYSE: TOL).
From a valuation standpoint, it appears that NVR is under-appreciated by the broader markets, as it is trading at a Price-to-Earnings Growth ratio of 0.5; typically any figure below 1.0 signals undervaluation. Moreover, this is also below the likes of PHM (0.9) and TOL (5.2), and equal to DHI (0.5) and LEN (0.5). In comparison to historical levels, NVR’s earnings are trading at a slight premium, but this looks warranted as earnings growth is expected to increase heading into the next housing cycle. The company has grown its operating (83.6%) and free (83.3%) cash flows quite nicely over the past two years, though its current Price-to Cash Flow ratio (38.9X) indicates that it is trading at a major discount in relation to its 10-year (265.2X) and 5-year (865.0X) historical averages.
Going forward, we like NVR’s ability to maintain strong operating (7.0%) and net (4.9%) margins – the company’s true strength. While these metrics are not a perfect measure of efficiency, they do show that NVR is much more profitable than industry norms (-0.3%, -2.7%), PHM (0.2%, -4.3%), DHI (3.4%, 3.4%), and TOL (-2.3%, 4.7%). It is this advantage that may yield NVR a rather deep economic moat in comparison to its competitors, which is undeniably a factor of the company’s unique business model (explained in detail here).
If the company is able to hit year-end earnings targets, fairly valued shares of NVR can eclipse $900 by Christmastime; they currently trade in the mid $700s. Looking toward the end of 2013, strong EPS growth could push the stock above $1000 by this time. WealthLift’s Sentiment Index rates NVR as a strong buy, with nearly all of the community’s users placing an “overperform” rating on the stock. For more trading ideas in an uncertain market environment, visit WealthLift INSIDER today.