Green Brick Partners & AGNC Stock: Playing The Housing Market (NYSE:GRBK)

Investment Thesis

Using my strategy by splitting the risk between multiple stocks, AGNC Investment Corp. (NASDAQ:NASDAQ:AGNC) and Green Brick Partners (NYSE:NYSE:GRBK) allows one to gain both growth and income at the same time. With expansion into new markets from Green Brick over the next few years, one can expect continued revenue growth and meaningful share price appreciation after a recent 30% decline. AGNC can provide investors a high dividend, with opportunities for reinvestment and compounding long-term.

Introduction

“A rising tide lifts all boats” is a common aphorism which accurately describes the current environment in the U.S. housing market. To be fair, we have had this rising-tide for many years now, and nobody really knows when the tide will wash out. We are now at a time when interest rates are moving higher, and the market is at a sort-of inflection point.

There will be quite a lot of supply coming onto the market in the second half of this year and into the first half of 2023, mainly from new construction. This rising rate environment and fresh supply hitting the market creates a situation that many have not had to struggle with, as it has been out of the minds of investors for the past few years as Covid-19 rocked the market and low interest rates spurred on home purchasing.

However, it is not all doom and gloom for the future of the housing market. I have found two stocks which, by splitting the risk, investors can gain exposure to U.S. homebuilders using both growth and income strategies in their portfolios.

The Growth Strategy

My first recommendation for investors is Texas-based Green Brick Partners Inc. (NYSE:GRBK) which is one of the fastest growing homebuilders and land developers in the United States. In fact, it was named as the fastest growing public homebuilder by Fortune Magazine in 2021, with eight homebuilder brands across four different states.

Green Brick Partners has retreated just over 30% from the recent highs set on December 10th, 2021. This steep sell-off started right at the beginning of the year, when rising rates spooked the market and sent growth stocks crashing back to reality. GRBK is down approximately 1.5% in the last year, but down nearly 25% year-to-date. The current stock price has already priced-in higher interest rates, and has provided a near perfect setup for a buying opportunity with a margin of safety for the future.

In terms of valuation, Green Brick Partners seems ultra cheap, even with factoring in higher rates. The stock is currently trading at a P/E ratio of 5.9, a price-to-book ratio of 1.2, and a price-to-sales ratio of 0.8. The fastest growing public homebuilder in the U.S. trading at less than one times sales? Yes, you read that correctly.

With an enterprise value-to-sales ratio of 1.0, the stock is, in my opinion, priced very fairly given the growth potential. GRBK is my newest long position, along with AGNC, which will be the next investment to discuss.

Many of you may already know about Green Brick Partners due to “superinvestor” David Einhorn and his Greenlight Capital Fund. The stock is the largest holding in the portfolio, making up roughly 32% of the total assets. While this is not the main reason I decided to invest in GRBK, the oversized position by a “superinvestor” provides me with some reassurance that I am on the right track in terms of finding investment opportunities.

The future certainly looks bright for the company. Recently, on February 8th, 2022, Green Brick Partners announced they would be expanding into Austin, Texas with construction starting in early 2023 and sales expected in Spring 2023. Inventory continues to be limited, causing problems for entry-level homebuyers, and this new construction in Austin is prime real estate. Expansion into Austin, Texas was my dream come true after purchasing my initial shares in the company, and now my conviction is higher than ever.

The Income Strategy

The second recommendation for investors is AGNC Investment Corp (NASDAQ:AGNC). AGNC is an internally-managed mortgage real estate investment trust, and is the second largest residential mortgage REIT with a market capitalization of over $5 billion. The stock currently pays a hefty 11% dividend, and trades at a P/E ratio of around 10, making it an optimal option for investors who wish to get income in their portfolio.

Higher rates are actually not as troublesome as one may think for investors. There are possibilities to be hedged for this upcoming environment, and still have attractive leveraged investment returns. The obvious challenges for mortgages, and all other fixed income, is the transition period the market goes through to get to the end result, whatever it may be. This is the worry in the markets today, and could be a reason why 2022 has got off to such a rough start.

AGNC can ultimately hedge its costs, but not its portfolio. This means that the book value of its holdings is more vulnerable than their income. Since rising rates make mortgages less valuable, the actual book value goes down. However, hedging is not the only thing the company can do to protect itself. AGNC has taken steps to reduce its leverage to 7.7 times from 9.4 times in the fourth quarter of 2019. While this is quite a bit of leverage, it is still below that of many commercial banks.

For the income-seeking investor who is willing to stomach some volatility, AGNC provides the other half of the coin, so to speak, to Green Brick Partners. With this strategy, one can gain exposure to the U.S. housing market and get both growth and income at the same time.

The Risks And Things To Consider

Of course, every investment has its own set of risks and challenges. Green Brick Partners could have next year’s sales meaningfully lower due to higher rates putting pressure on homebuyers, or an economic recession which would call the growth story into question. The housing market is at an inflection point, with a lot of uncertainties right now. This is precisely why the shares of both companies are trading so cheap.

AGNC’s all-time chart is also painful to look at, with a bearish trend still intact over the long-term. However, a retracement of the Covid lows at $9.51 per share is unlikely to occur from here, but lower prices on dividend stocks are actually welcomed because of the reinvestment opportunities. Not all investors may have the stomach for this type of volatility or investment, and that is perfectly fine. This hybrid strategy can be modified with other income-generating stocks or high-yield bonds.

While it may not look like it at first glance, since AGNC’s IPO in 2008, the stock has actually generated a 12.1% annualized return (including reinvested dividends), versus around a 10.9% annualized return for the S&P 500.

Conclusion

By splitting the risk between Green Brick Partners and AGNC, investors can benefit from this hybrid strategy for both growth and income. GRBK has retraced nearly 30% from the recent highs set in December of 2021, due to rising rates and general market volatility. This provides an entry point to accumulate shares as part of a long-term growth strategy. For investors seeking income, AGNC pays an 11% dividend, and is taking steps to hedge its costs and eliminate some leverage compared to past years. The portfolio strategy discussed in this article is an excellent way for investors to play U.S. homebuilders, and I rate both GRBK and AGNC as strong buys at this time.