What Makes a 100-Bagger?💰

Happy Sunday!

In this edition of the FinChat Newsletter we’ll take a look at OpenAI’s rebuttal against Elon Musk, study one of the best performing stocks of the last 30 years, and even take a gander into the high-flying world of crypto.

Let’s get into it.

News Roundup

• EU Fines Apple: The European Commission fined iPhone maker Apple ~$2 billion for “abusing its dominant position on the market for distribution of music streaming apps”. The complaint specifically calls out Apple’s use of “anti-steering provisions” which have prevented other music-streaming developers from telling users about cheaper payment alternatives. Apple’s stock is down 10% this month.

• Musk vs. OpenAI: Last week, Elon Musk filed a lawsuit against OpenAI, the parent company behind ChatGPT, for breaching their founding agreement of operating as a non-profit. This week, OpenAI responded by publishing emails sent by Musk over the years which actually encouraged the company to pursue raising money as a for-profit company and even included Musk suggesting that the company should make him the CEO. OpenAI said it intends to dismiss all of Musk’s claims in court.

• Retail Earnings:

  • Costco: The 3rd largest retailer in the US by market cap beat earnings estimates this quarter but came in under expectations for revenue. Excluding changes in gas prices and foreign exchange, the company delivered 4.8% same store sales growth for the quarter. Costco’s stock was down 4% for the week.

    

  • Kroger: Just a week after the Federal Trade Commission sued to block Kroger’s proposed $25 billion acquisition of Albertsons, the grocery giant reported better than expected sales and profits for the 4th quarter thanks to increased customer visits.
    Kroger CEO Rodney McMullen stated: “As customers manage macroeconomic pressures, we are lowering prices and offering even more ways to save with personalized promotions and rewards.” Kroger’s stock was up 14% this week.

  • Target: The Minneapolis based retailer reported sales for the holiday quarter that came in above expectations, but tempered enthusiasm with lackluster sales guidance for 2024. Target’s comp sales were down 4.4% relative to last year, but its stock still finished the week up 10%.

  • Ross Stores: Discount retailing giant Ross Stores delivered a strong fourth quarter to close out its 2023 fiscal year. Driven by 7% growth in comp store sales and improved operating margins, Ross beat expectations on both the top and bottom line. Ross’ board of directors also approved a new 2 year share repurchase program of $2.1 billion (4.3% of its market cap). Shares finished the week down 3.2%.

Company Spotlight

NVR: The Anatomy of a 100-bagger

If you invested $10,000 in NVR 30 years ago, you’d have more than $13 million today! 

That’s a 27% CAGR since 1994.

Here’s the blueprint behind this ~130 bagger.

Bankruptcy: That’s probably not the first word that comes to mind when studying a 100-bagger. However, the early 1990’s were a difficult time for the housing market in the US, and NVR (the largest homebuilder in the DC metro area at the time) was no exception. 

As demand for new homes dried up, NVR was caught with tons of debt-financed land stuck on its balance sheet. This led to NVR filing for Chapter 11 bankruptcy protection in 1992. 

After reemerging from bankruptcy in 1993, then CEO Dwight Schar had learned the hard way how he wanted to run the business. He would avoid having debt, land, or vacant lots on the balance sheet as much as he could.

And the way Schar did that was by implementing a new model using “Lot Options”.

The Lot Option Model: Unlike traditional homebuilders which acquire large plots of land and hold that land on their balance sheet while they develop homes on it, NVR would instead purchase an "option" on the land. 

This meant that NVR would usually pay 5%-7% of the land value upfront and then could exercise the right to pay the remainder once the lot was finished. This model is considered “asset-light” as it keeps the inventory off of NVR's balance sheet, which helps the company during market downturns. 

In the meantime, while the land is being held by NVR’s partners, NVR is actively selling the homes that’ll be there. Once NVR receives the commitment from buyers and knows the demand is there, then they exercise the right to buy the land and sell the home. 

This “Just In Time” purchasing model leads to lower capital investments upfront and quicker inventory turns. In other words, they sell the homes faster, which helps drive substantially higher returns on equity than the rest of the homebuilding industry.

Economies of scale: In addition to having a unique model, NVR also possesses some cost advantages over other homebuilders thanks to their scale in certain markets.

To name a few, NVR can get better deals from 3rd party contractors as a reputable partner in the area, materials costs are lower when bought in bulk, and NVR can do certain parts of the building process themselves such as walls, trusses, and millwork.

Anatomy of a 100-bagger: While NVR’s jaw-dropping returns for early investors like Punchcard Capital’s Norbert Lou are one of a kind in the homebuilding industry, some of the characteristics NVR possesses are common among other 100 baggers as well. Here are a couple:

1. Room for multiple expansion: The wave of homebuilder bankruptcies in the housing market downturn of the early 1990’s left a sour taste in investors’ mouths.

   So much so that despite the business model shift, NVR still traded at a single-digit earnings multiple for several years following its bankruptcy. This has progressively changed as NVR demonstrated how much more resilient the land-option model is in difficult times. 

2. High returns on capital: NVR’s unique model allows the company to consistently generate returns on capital at twice the rate of the rest of the homebuilding industry. 

3. Room to invest: Simply generating a high ROIC or ROE doesn’t mean a stock will lead to stellar returns. The company also needs room to continue deploying capital at high rates. In the case of NVR, they could have used their early earnings to buy back stock but because they saw the opportunity and the need for new homes they continued to generate strong returns that way. In the word’s of long-time NVR investor, Norbert Lou “You actually want the companies that have such bountiful reinvestment opportunities that they don’t buy back any shares”.

Shipping Big Upgrades 🚀

FinChat is quickly becoming the one-stop-shop for all your investing research.

And this week, the FinChat team launched several new features to help users get even more out of our platform.

Estimates Included in Financials 📈 Consensus analyst estimates for revenue, operating income, net income, and EPS are now available for charting within the each company’s individual page. Our consensus estimates cover roughly 50,000 stocks around the globe.

• Redesigned Company Header: Within each company page users can now see the daily stock price performance and easily add the company to their watchlist.

• Stacking Bar Charts 📊 Our users asked for it, so we built it. Now, users can stack financials and KPI’s on top of one another. To supplement the conference call audio, you can now check out a company’s earnings report press release from within FinChat.

We added several other features as well. You can always refer to our Changelog to stay up to date.

Meme of The Week

When Bitcoin hits new all-time highs

Bitcoin reached a high of $69,735 this week, surpassing its previous record for the first time since November of 2021.

While interest in Bitcoin seems to be on the rise again, perhaps driven by recent Bitcoin ETF approvals, it’s the smaller crypto projects that are stealing the show.

A token called Pepe rose by more than 200% over the last week, while crypto tokens associated with presidential candidates Joe Biden and Donald Trump have both jumped more than 100,000% since launching less than a month ago.

It seems the market euphoria reminiscent of 2020 and 2021 is starting to come back.