Woodson Capital Management has made a big bet on homebuilder stocks.
The Tiger Seed headed by Jim Davis told clients in its first-quarter letter that 8.8 percent of its capital is invested in the sector.
Woodson described the big investment as a “contrarian long view,” noting that the group’s share prices have fallen to record low P/E and book-value multiples due to fears that a confluence of demand pressures “will send the sector to a crash.”
The pressures include sharply higher mortgage rates, high home prices, declining savings, and low consumer confidence. “While affordability challenges obviously pressure marginal demand, the housing market’s stubbornly tight current and prospective supply underpins our still-constructive stance on the industry,” Woodson explained in the letter.
Woodson is the fund that was up more than 118 percent in 2020, driven heavily by a huge bet on high-end exercise bicycle maker Peloton Interactive. However, it dropped 34.4 percent last year and was down 16 percent this year through April, this time driven heavily by Peloton’s stock collapse, along with other losing positions.
Davis founded Woodson in 2010 with backing from Tiger Management’s Julian Robertson Jr. He was an equity analyst at Tiger Management from 2006 through 2008, and from 2008 to 2009 worked as an equity analyst at Venesprie Capital, another Tiger-seeded long-short equity fund.
In the letter dated June 15, Davis stressed that homes-for-sale inventory is at four-decade lows, as are rental vacancy rates. He added that due to rising mortgage rates, the pace of existing home listings may slow down moving forward.
At the same time, the housing industry is still scarred from the huge overexpansion in prior up-cycles, thus creating a housing shortage. These issues, in turn, have been exacerbated by supply-chain bottlenecks and labor shortages.
Yet there is still a major potential source of demand — millennials aging into prime household formation years.
“With strong profitability in recent years, public homebuilders have de-levered and de-risked their balance sheets,” Davis stated. “Against very low earnings multiples, homebuilders’ prospective capital returns stand to be highly lucrative to shareholders.”
He said he has a “large holding” in DR Horton, along with smaller positions in several other builders.
Woodson’s two largest longs, meanwhile, are Funko and Deckers Outdoor, long-term holdings that now account for 10.3 percent and 8 percent of the firm’s assets, respectively, according to the letter. Woodson currently finds the two stocks “especially compelling” and “poised for record profits this year, despite continued supply-chain pressures that should abate and potentially reverse going forward.”
Davis pointed out that Funko, a maker of pop culture toys, recently received a major investment from the private equity firm Chernin Group, which specializes in investing in these types of companies, and from an investor group that includes eBay, former Disney head Bob Iger, and sports super-agent Rich Paul, who joined the company’s board. “We are excited to see how the company leverages their collective experience and connections,” Davis stated.
He stressed that footwear company Deckers gets 30 percent of its sales from its HOKA brand, which he called “one of the most prolific growth stories in the consumer sector.”
“HOKA’s strong growth and attractive economics are complemented well by the robust cash flow generation of the more mature UGG brand,” Davis added.
As for Peloton, the stock remained a major loser for the fund earlier this year. Its position size no longer qualifies it for a spot in the firm’s top-five holdings, however. “We severely underestimated the magnitude of leadership’s strategic and operation missteps and deeply regret the losses [that] Woodson’s partners have borne as a result,” Davis conceded.
Nevertheless, he’s excited about the new executive leadership. And he noted that the contribution margin on subscription revenues has steadily grown.
