Our Long Idea reports aim to identify stocks that the market has overlooked and that, when analyzed with more rigor[1] than provided by tradition financial metrics, offer excellent risk/reward.

However, the thesis does not always play out as we expect and, at times, some stocks only get more undervalued.

Below, we present the Long Idea highlights and lowlights.

Long Idea Highlights

When we first featured NVR Inc. as a Long Idea, we felt its shareholder friendly exec comp plan, history of increasing market share, and a rising housing market could propel shares over the long-term. Despite positive catalysts and a strong competitive position, the market had priced NVR for permanent profit decline at the time of writing. NVR had a price-to-economic book value (PEBV) ratio of 0.9. This ratio meant the market expected NVR's after-tax profit (NOPAT) to permanently decline by 10%.

Instead, over the past twelve months NVR has grown NOPAT 27% over the prior trailing twelve months (TTM). TTM NOPAT margin improved to 9% versus 8% in 2016, and its return on invested capital (ROIC) improved 380 basis points over the prior TTM.  These impressive results led to multiple earnings beats and a 59% increase in stock price, which caused us to revisit, and reiterate, the idea in late November. At that time, we still found NVR to be undervalued by the market and maintained our Long Idea.

Spirit AeroSystems was an underappreciated Industrials stock with strong fundamentals that the market had failed to recognize. Since restructuring in 2013, the company's profitability was on the rise, and its competitive position within the aircraft supplier market was improving. At the time of publishing, we noted that SPR's top-quintile 16% ROIC exceeded its peer average (9%) and the company's balance sheet efficiency, as measured by average invested capital turns (1.8), were more than double its peer average (0.7).