Andvari Associates, an investment management firm, published its first quarter 2021 investor letter – a copy of which can be seen here. A return of -5.2% was delivered by the fund for the Q1 of 2021, below its S&P 500 and Russell 2000 benchmarks that delivered a 6.2% and 12.7% returns respectively for the same period. You can view the fund’s top 5 holdings to have a peek at their top bets for 2021.
Andvari Associates, in their Q1 2021 investor letter, mentioned CoStar Group, Inc. (NASDAQ: CSGP), and shared their insights on the company. CoStar Group, Inc. is a Washington, D.C.-based commercial property company that currently has a $34 billion market capitalization. Since the beginning of the year, CSGP delivered a -6.72% return, while its 12-month gains are up by 33.00%. As of April 28, 2021, the stock closed at $862.16 per share.
Here is what Andvari Associates has to say about CoStar Group, Inc. in their Q1 2021 investor letter:
“ANDREW FLORANCE & COSTAR GROUP
Moments of volatility within a portfolio like Andvari’s regularly prove opportune. We indeed took advantage of the volatility during the quarter to concentrate our book further. Andvari sold three holdings and reinvested the proceeds back into several other current holdings with better prospects. CoStar Group is one of those current holdings to which we added.
Andvari is attracted to CoStar because it is a great business with an amazing founder. Andrew Florance founded the company in 1987 at the age of 23 and is still the CEO. Florance has an inspiring life story and an envious track record of success. We strongly believe Florance is a person of integrity who measures himself with an internal yardstick rather than an external one. This is important to Andvari as he is far more likely to prioritize building a phenomenal company rather than maximizing his personal wealth at the expense of shareholders.
HUMBLE BEGINNINGS
In a 2019 commencement speech to Virginia Commonwealth University graduates, Florance shared his life story. At the age of seven, he was homeless and had missed more than two years of school. In 1971, the Richmond police took custody of Andy away from his mother. That was the last time he would see her.
Florance overcame this unfortunate starting point with help from others, education, luck, and a lot of hard work. At age 11, he was making enough money to support himself. By age 12 he had applied to and gotten into a music school in New York City. He learned to strive for perfection and to loathe mediocrity. “Getting closer to perfection is a joyous experience,” said Florance.
At school Florance taught himself how to code on a computer. After college, he wanted to use the money he had made on programming jobs to buy and renovate abandoned buildings. However, he became frustrated with the lack of data on properties. Thus, he used his programming skills to develop a commercial real estate (CRE) data service. He founded Realty Information Group (later renamed CoStar) in 1987 to pursue this mission.
HOLDING OUT FOR MORE
After a year or so of grinding out 120-hour work weeks for a meager existence, Florance received an offer to buy his business for half a million dollars. He was inches away from selling the business, but the lawyer he had hired convinced him not to sell. This lawyer believed in the vision of a 23-year-old and invested every dollar he had or could borrow into Florance’s company. The lawyer even took out a second mortgage without telling his wife.
The decision to not sell and to accept investor capital ultimately proved to be the right one. CoStar Group now has revenues of $1.6 billion and a market valuation of over $30 billion.
THE BUSINESS OF COSTAR
CoStar has two businesses, their original CRE information business and their online marketplace business. The information business collects and maintains property level data in major real estate markets. The brokerage firms back then all had in-house departments that collected data. This was a time- and money-consuming effort that was not core to the business of leasing and transacting real estate for clients.
Florance saw that a single company collecting data could eliminate the duplicative in-house efforts, provide the data at a lower total cost, and earn high margins for itself at scale. The CoStar Suite of products is now the industry standard with 93% of the top 1,000 brokerage firms as clients.
Online marketplaces are CoStar’s second business. If you’re an owner of multifamily apartments, your best option to lease up your units is to advertise through CoStar’s Apartments.com web site. If you have commercial property or rural land to sell or lease, the best place to go is CoStar’s LoopNet and LandsofAmerica. These online sites have extremely high profits because they are beneficiaries of network effects. They have the largest amount of web traffic which attracts more advertising dollars. For example, LoopNet has 20x the monthly web traffic of its next closest competitor.
CoStar estimates the total value of commercial real estate across the globe is $66 trillion. CoStar’s data and services are essential for the lease, sale, and valuation of CRE properties. With $1.6 billion in revenues, CoStar is still a small service provider in the grand scheme. The company has room to grow significantly over the next 10 years.
They are still at the beginning stages of building out their CRE data business in Europe. With their apartment listing service in the U.S., there is a massive opportunity to increase their 3% penetration of the 350,000 apartment communities with 5 to 100 units. Finally, we expect CoStar’s already high margins will continue to expand over time.”
Our calculations show that CoStar Group, Inc. (NASDAQ: CSGP) does not belong in our list of the 30 Most Popular Stocks Among Hedge Funds. As of the end of the fourth quarter of 2020, CoStar Group, Inc. was in 51 hedge fund portfolios, compared to 55 funds in the third quarter. CSGP delivered a -4.40% return in the past 3 months.
The top 10 stocks among hedge funds returned 231.2% between 2015 and 2020, and outperformed the S&P 500 Index ETFs by more than 126 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds’ poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Here you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.
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Disclosure: None. This article is originally published at Insider Monkey.
