Investing Matters is a podcast hosted by investor Peter Higgins, published in association with London South East, a leading stock information website in the U.K.

Ensemble Capital senior investment analyst, Todd Wenning, sat down with Peter in September to discuss, among other topics:

  • Ensemble’s investing philosophy, including a walk-through of our Venn diagram.
  • Different types of moats that we look for at Ensemble.
  • How the annual Berkshire Hathaway meeting in Omaha is a reminder of the importance of integrity and long-term thinking.
  • Why we prefer to look at how a company treats its stakeholders rather than take a formal ESG approach.

You can listen to the interview using the link below, or wherever you get your podcasts. A video version is also available on YouTube.

During our third quarter portfolio update, we profiled portfolio holding, NVR (NVR). Below is a replay of our live commentary on the company from our quarterly portfolio update webinar and an excerpt from our QUARTERLY LETTER.

In his presentation, Todd referred to our previous webinar profile on NVR from January 2021, which can be found here.


The US housing market has been unstable so far this year, as rising mortgage rates and higher housing prices have rapidly reduced affordability. Fortunately for existing homeowners, most of whom own their houses outright or have locked in low, fixed mortgage rates, rising rates have not directly impacted their finances unless they have an outstanding variable-rate home equity line of credit.

Homebuilders, who rely on incremental demand for housing, have seen demand dry up in response to declining affordability. Single-family home building permits have plummeted in recent months back to pre-pandemic levels.

That’s the bad news. On the bright side, the building materials supply chain, which delayed construction and increased the cost to build a home, is rapidly improving. This bodes well for homebuilders like NVR with a track record of cost discipline. In other words, even if NVR’s average selling price declines, it can maintain attractive gross margins if they simultaneously control costs.


According to the National Association of Home Builders, the ten-largest builders’ market share increased from 8.7% in 1989 to 34.2% in 2021. There are various reasons for this steady trend toward industry consolidation, but two factors – land availability and cost control – are near the top of the list. Critical to any home builder’s profitability is securing cheap yet attractive land, which is getting harder to come by. Smaller, independent homebuilders don’t have as many financial and operational resources to obtain sufficient amounts of cheap and attractive land knowing that demand to build on that land may not materialize for a few years, if ever.

Similarly, larger builders like NVR can source materials more efficiently and spread costs among more jobs than smaller builders. This makes it difficult for smaller builders to generate attractive cash flows that can be used to reinvest in their businesses. Naturally, then, large builders have an advantage that should increase in down markets when smaller players get shaken out of the industry.

We believe NVR remains well-positioned when it comes to having communities in attractive locations and having affordable price points. Relative to other major homebuilders, NVR has greater exposure to the exurban (beyond suburban) areas and second- and third-tier cities like Richmond, Virginia and Cincinnati, Ohio, where housing tends to be more affordable compared with major cities or “hot” real estate markets like Boise, Idaho and Austin, Texas. Further, to the extent that remote- and hybrid-work arrangements remain relevant – we believe they will – NVR’s locations away from city centers should be attractive to new home buyers. Longer commutes become more palatable if they don’t have to be done every day.

It’s important to remember that NVR’s markets don’t necessarily have a strong positive correlation with what’s going on in the national housing market. NVR operates in a specific region of the United States, all east of the Mississippi River. So even if housing prices in high-growth areas in the western half of the United States are sharply declining, NVR’s markets may be holding up relatively well. Some of NVR’s markets,  particularly its home region of the Mid-Atlantic and the Northeast, tend to be more mature. While growth is more limited in those regions, they are also less vulnerable to house price declines.

It’s worth reiterating NVR’s two-pronged business model – first, be asset light and second, maximize local market share. On the first point, NVR only uses option agreements to control land until there’s present demand to build on the land. NVR pays landowners a premium for the right to purchase the land by a later date at an agreed-upon price. If demand doesn’t materialize, the most NVR loses is the premium paid to control the land for a certain period of time. Using options in this way frees up NVR’s capital to be deployed in a manner that management considers prudent.

Other homebuilders make greater use of outright land ownership where they buy the land and keep it on their balance sheet, hoping to one day build on the land. Owning the land works really well in a robust real estate market where affordable, shovel-ready land can be in short supply. On the other hand, it does not work well when demand doesn’t materialize, and the home builder has to carry the land on its inventory. If the home builder also carries substantial debt – which many do – they may get into a situation where they need to sell the land at a steep discount to service their debt.

Unlike its major homebuilding peers, NVR has a net cash balance sheet, meaning it could pay off all its debt today and still have plenty of cash leftover. As such, we believe NVR’s asset-light, cash-rich balance sheet is a distinct advantage during downcycles in the housing market. This was on display following the housing crisis when NVR moved into new markets like Florida and Ohio, which subsequently became attractive growth markets for the company. In the event of a prolonged weak housing market, we expect NVR to make similarly opportunistic investments to grow the business.

The second prong of NVR’s business model, to maximize local market share, is also designed to help the business be resilient in down markets. NVR has seven manufacturing centers, in which the company receives bulk materials and pre-fabricates parts of the home – panels, interior stairs, etc. – before sending the sections to the job site. The more communities that NVR develops around these manufacturing centers, the more efficiently and quickly NVR can turn its inventory. Greater local market share also allows NVR to maintain sub-contractor relationships across housing cycles, as sub-contractors know there will always be business working with NVR.

We chose NVR over other homebuilders because we think they are best positioned to capitalize on what we believe to be a long-term secular tailwind for US housing activity. Research group Evercore recently stated that it would take a decade of 2 million annual housing starts to make up for the deficit in housing activity incurred after the housing crisis of the late 2000s. In September, the president of the Philadelphia Federal Reserve stated that, despite the Fed raising interest rates, “The bottom line is this: We need to build (homes).” There will inevitably be up-and-down cycles in the housing market while these ends are pursued. We believe NVR has the most resilient business model and is led by the best capital allocators in the homebuilding industry. As such, we expect NVR to take share from both smaller competitors and its larger peers during down cycles and come out stronger on the other side.

Below is the Q3 2022 quarterly letter sent to separately managed account clients. You can find historical Investor Communications HERE and information on how to invest HEREEnjoy!

The performance of securities mentioned within this letter refers to how the security performed in the market and does not reflect the performance attributed to the core equity portfolio. Please see the chart at the end of letter, which reflects the full list of contributors and detractors based on each security’s weighting within the core equity portfolio.

You can request a copy of Ensemble Capital’s equity strategy performance presentation here. The presentation is updated by the end of the month after each quarter end.

After three consecutive quarters of underperformance, our investment strategy began to rebound this quarter relative to the S&P 500, declining an estimated 2.6%[1] vs the S&P 500 down 4.9%. As has often been the case after periods of material underperformance, our performance this quarter was positively impacted by many of the same stocks that hurt our performance earlier.

Notably, our strategy outperformed despite the overall market selloff continuing in the third quarter. On a relative basis to the S&P 500, our performance bottomed out in mid-May of this year, and we’ve been materially ahead of our benchmark since then despite the S&P 500 being down by more than 8% over that time period. Over our long history prior to this year, our investment strategy exhibited a beta, or volatility relative to the S&P 500 of 1.0 or less, with downside capture of less than 100%. So our outperformance during a down market over the last four and a half months has not been atypical, rather it was our underperformance during the significant sell off from November 2021 through May of this year that was out of character with our long-term results.

The high growth stocks we discussed last quarter performed strongly in the third quarter, with Netflix up 35%, Illumina up 3%, and Masimo up 8%, although our smaller position in ServiceNow was down 21%. Housing related stocks, the other area responsible for an outsized portion of our underperformance this year, were more mixed with First American down 12%, while NVR was flat and Home Depot was up 1%. Collectively, these two groups of stocks, weighed heavily on our relative performance during the three-quarter period ending on June 30th. But in the just completed third quarter, the high growth stocks added 2.3% to our relative performance while our housing related investments added 0.2% to our relative returns.

The third quarter began with better than feared corporate earnings growth with S&P 500 earnings for the second quarter reported as growing at an above average rate. During the first half of the quarter, through mid-August, recession worries were tempered as very strong job creation continued. At the same time inflation worries faded a bit and market participants began to anticipate the Federal Reserve might stop raising rates a bit sooner than expected and even cut interest rates in 2023. These twin developments powered the market to a 16% rally off its June lows before Fed officials began to make clear that they had no intention of ending their rate hikes or declaring victory over inflation any time soon. The market ended up giving back all of its mid-summer rally and fell to new lows in the last few days of September as many investors came to worry that a major recession was now inevitable, and the Federal Reserve may make a policy mistake in raising rates too high and holding them there for too long.

At Ensemble, we don’t believe that accurately predicting recessions ahead of time is possible. Certainly, the Federal Reserve focuses an incredible amount of intellectual firepower and effectively unlimited financial resources at trying to figure out how the economy will evolve in the future, yet their track record of making accurate forecasts about the future is dismal. Wall Street firms expend a similarly huge amount of resources to predict the economy and yet while various economists will get a big call right from time to time, there is little evidence that any person or approach to economic forecasting is accurate enough to correctly predict the timing of recessions with high confidence.

The easiest recession to predict was likely the COVID recession once it became clear that many businesses would be mandated to shut down for an indefinite time period. But what was completely unpredictable was that the COVID recession would last for only one month and the economic recovery would end up being the fastest recorded in US history.

But investors absolutely can, and must, consider the probability of a recession at any given time and think through the range of potential outcomes. It could be that American consumers, whose spending makes up 70% of the US economy, simply keep spending money as they have all year long and a recession is avoided. Job creation has remained robust, wage growth is strong, US households have low levels of debt and unprecedented levels of cash savings.

Recall that last year we talked about the Wall of Money, the more than $2 trillion of excess savings that households accrued during COVID, that we expected would support consumer spending for years to come. Given the resilience of consumers in the face of widespread recession worries, it is clear that these savings, which still total between $1.5 and $2 trillion depending on the assumptions used, remain an important buffer offsetting the very reasonable economic anxiety that is widespread among consumers.

On the other hand, it is crystal clear that some parts of the economy are already contracting. It may very well be the case that consumers pull back their spending, triggering weaker results for companies, who then begin laying employees off, driving down the American consumers’ ability to spend and we enter a recession.

Because recessions occur every seven to 10 years, the odds of a recession in any randomly selected year is about 10%-15%. This is true even when there are no obvious signs that a significant economic slowdown is around the corner. Given the range of warning signs about a potential recession that are clearly apparent today, the odds of a recession are much higher than normal and are above 50% in our estimation. Given the very real risk of a recession, paired with the fact that the US stock market as measured by the S&P 500 has already declined by as much as 24% from its highs, it is critical for investors to focus not just on the binary question of whether or not we get a recession, but the depth and duration of a recession if it arrives. In addition, due to the unique economic impacts of COVID in recent years, it is important for investors to grapple with the way that this particular recession may have a very different character than past recessions with various industries following very different paths than historical analogies might suggest.

One simple observation about recessions is that there have been 12 of them since World War II, of which two thirds might be characterized as mild while the other third were severe. Investors without a sense of history may[…]

During our third quarter portfolio update webinar, Ensemble Capital’s Chief Investment Officer Sean Stannard-Stockton and senior investment analysts Arif Karim and Todd Wenning discussed the current market and economic situation. They also commented on third quarter performance and discussed two of our holdings, NVR (NVR) and Schwab (SCHW) at length. The webinar concluded with a live Q&A session with the team.

Below is a replay of the full webinar as well as a link to Ensemble Capital’s QUARTERLY LETTER.


(If you’re viewing this by email, CLICK HERE to watch the video.)

While our quarterly webinar is an unscripted, more casual discussion, we also produce a quarterly letter that covers the same topics but in written form and with more detail. You can find a copy of our third quarter letter HERE.

Each quarter, Ensemble Capital hosts a webinar to discuss the current market, economic conditions, and a few of our portfolio holdings. This quarter, the team will present on our investments in homebuilder NVR and financial services company, Schwab.

The event will use a webinar format. Participants will have a chance to ask live questions of the research team during the Q&A portion of the event.

This quarter’s webinar will be held on Monday, October 10 at 1:30 pm (PST)

We’d love for you to join us, which you can do by REGISTERING HERE.

If you’d like to listen to our previously-held quarterly updates, an archive can be FOUND HERE.

We hope to see you there!