The Magic of OPM: Other People’s Money

How to Build a Billion-Dollar Business with No Capital

Welcome to Porter & Co.! If you’re new here, thank you for joining us… and we look forward to getting to know you better. You can email your personal concierge, Lance, at this address, with any questions you might have about your subscription… The Big Secret on Wall Street… how to navigate our website… or anything else. You can also email our "Mailbag" address at any time: mailbag@porterandcompanyresearch.com.

At the end of this issue, you’ll find our model portfolio and watchlist (which is also here) — as well as a “Best Buys” section, where we’ll briefly cover three portfolio names that we think you should consider buying first.

In addition to hosting The Big Secret on our website, it is also available as a downloadable PDF. Click here to download the full report.

Again… we’re excited that you’re with us…and we’re looking forward to a long and fulfilling relationship.

If you're not a member and would like to learn more, click here.

Patrick didn’t set out to revolutionize an industry.

He just wanted to build houses.

During the roaring housing mania of 2005, the business he was building was a tiny fish swimming in a giant pond. He was trying to find empty lots to build new homes on. But land was scarce, and expensive. His competitors were multi-billion-dollar corporations, and they were scooping up property like marbles on the sidewalk.

At the time, young Patrick hardly had two nickels to rub together. A recent college grad, he’d just moved to Jacksonville, Florida to help his realtor mother buy and sell homes. He also helped buy foreclosed properties and fix them up for resale.

Patrick learned about houses by laying tile, hanging drywall and putting up siding on recently foreclosed properties. He also learned how to identify the right land at the right price for building new homes.

But at the peak of the housing boom, any price was a “right price.” Home builders merrily shelled out ever-larger bales of cash to scoop up vast expanses of land at rich valuations, believing there was a fortune to be made by selling new houses back into the bubble.

As Patrick later explained, in an October 2020 interview:

“Running up to the recession, you couldn’t find a way into the market because the national builders were buying up 500 lots at a time.”

It didn’t end well, of course. When the housing boom went bust, demand for new homes fell by 90%. The buy-it-all-at-any-price builders were forced to liquidate their land holdings at fire-sale prices. Prices for plots of land in Jacksonville fell by 70% from peak levels.

Amid the carnage, Patrick spotted a bargain: three promising empty lots, selling at a deeply discounted price. He figured he could build three homes on the lots for $200,000.

Patrick wanted to buy and build. He had just one problem… he didn’t have $200,000.

What he did have, though, was charm. He visited the Clay County Housing Finance Authority – a local government lender in Jacksonville that funded home construction to support affordable housing – and sweet-talked his way into a $200,000 loan to build three homes on the vacant lots.

But that was only half the battle. Besides buying the land, he’d have to pay for labor and materials. The cost of the land plus construction would be a lot more than $200,000.

Out of options, Patrick came up with a crazy idea.

He’d use other people’s money.

Specifically, the money of the developer who currently owned the lots.

Activating his powers of persuasion, Patrick convinced the developer to accept an IOU to wait for payment until he’d built and sold three houses on the land. That freed up the $200,000 he’d borrowed for construction.

That’s how college grad Patrick discovered the “asset-light” method of homebuilding… transforming the traditionally capital-intensive business of home building into a capital-efficient enterprise. Other companies, including many in our model portfolio, use an asset-light model, but Patrick’s brainstorm was a first for the real-estate business.

Or, so he thought…

We recently wrote about “simultaneous inventions”. Asset-light building is another innovative idea that evolved separately in two different places.

When Patrick issued an IOU to the developer, he was unknowingly following the playbook of NVR – a publicly traded homebuilder that had a very similar brainstorm in the 1990s. We wrote about NVR in July, in an issue that featured a tongue-in-cheek headline: The New “ENRON”.

Like Patrick, NVR was desperate. The company had gone bankrupt in April 1992 after being overexposed to inflated land values during the 1990 - 1991 recession that hit the real estate market.

When NVR emerged from bankruptcy, it figured out how to avoid the risk of holding too much land at the wrong point in the cycle. Instead of buying land outright, the company made deals with land developers to secure land using upfront deposits, which they could walk away from (forfeiting the deposit) if the market soured. This lowered their risk during downturns, and transformed the traditionally capital-intensive home building business into a beacon of capital efficiency.

Porter identified the brilliance of this business model back in October 2007 in Stansberry’s Investment Advisory:

“NVR pioneered a "land-lite" homebuilding business model. While most homebuilders buy vast tracts of land and develop them over years, NVR doesn't own any raw land – none… As a result, NVR only maintains a small amount of lot inventory compared to other builders… I'm sure my timing is way, way too early. But I'm prepared to average down and be very patient… Don't use a stop loss on this position, as NVR stands almost no chance of going bankrupt, but sentiment in the sector is very likely to decline.”

Investors who followed Porter’s advice posted total returns of 1109% from the October 2007 recommendation through today, compared with a 163% gain in the S&P 500 over the same period.

NVR is a perfect example of the “inevitable” stocks we track – companies with entrenched competitive advantages and stellar economics that make them “when,” not “if,” buys. That’s why NVR is on the watchlist in The Big Secret on Wall Street model portfolio to buy at the right price.

Patrick learned about NVR’s model after he’d launched his own company. He studied up on NVR, and became even more convinced that “other people’s money” was a winning approach. As he explained in his company’s 2021 annual shareholder letter:

“After several years, people began to mention that we reminded them of a builder called NVR out of Reston, VA. I had never heard of NVR because they were not actively building in any of our markets then, so I began to research their track record. I was astounded to appreciate that they had some of the best historical returns of any business, regardless of industry. Once we researched their performance through the financial crisis, it became very apparent this was going to be the only way we would ever run [our company].”

Over the last 14 years, Patrick has grown his upstart home builder by nearly 50% every year, starting with 27 homes in 2009, growing to 85 in 2010, then 150 in 2011 and 260 in 2012. The company crossed $1 billion in sales in 2020, and increased revenue by an average of 65% per year over the last three years. Perhaps the most impressive part is how he achieved this meteoric growth with no upfront capital, while generating positive earnings every year along the way.

The company is still in the early innings of rapid expansion, and we believe the best is yet to come.

That’s why today we’re recommending Patrick’s home building company. Outside of NVR, it’s the only other publicly traded home builder using this 100% asset-light playbook.

And because it’s much earlier than NVR in its growth trajectory, we believe the returns from investing today could exceed the market-crushing results that NVR has delivered since Porter’s original recommendation back in October 2007, which has outperformed the stock market by a factor of more than 8-to-1.

The Next NVR