Warren Buffett (Trades, Portfolio), often called the "Oracle of Omaha," epitomizes value investing and takes a long-term view of the stock market. His investment vehicle, Berkshire Hathaway Inc. (BKR.A) (BRK.B, Financial), has consistently beaten the market for decades, turning its stock picks and portfolio shifts into eagerly awaited events in the financial sphere. This anticipation is not just hype; it stems from the guru's extraordinary ability to identify undervalued companies with significant growth potential, which become valuable components of Berkshire's vast portfolio.
Fund managers who hold at least $100 million in assets publicly disclose their stock holdings to the U.S. Securities and Exchange Commission using Form 13F every quarter. This disclosure gives investors a unique glimpse into the portfolios of some of the world's largest and most successful hedge funds.
Among the many quarterly filings, investors eagerly anticipate the one from Buffett's Berkshire Hathaway. For the three months ended June 30, the insurance conglomerate disclosed three new positions in homebuilders, which caught many investors' attention.
While rising interest rates have increased the cost of mortgages for homebuyers, Buffett might anticipate a potential perfect storm of low housing inventory and decreased mortgage rates in 2024 and beyond. The stakes in homebuilders are small compared to Buffett's usual standards, but investors should monitor whether he buys more in the coming quarters.
At the same time, we need to analyze why Buffett could have decided to invest in these three stocks.
D.R. Horton
D.R. Horton Inc. (DHI, Financial), one of the largest publicly traded U.S. homebuilders by market capitalization and revenue, has exhibited a robust performance year-to-date with a return of almost 30%.
This impressive trajectory was further highlighted in its fiscal third-quarter 2023 results. Despite macroeconomic pressures, the company managed to rake in revenue of $9.73 billion, marking an increase of approximately 11% from the previous year. Notably, D.R. Horton recently acquired the assets of Truland Homes for a neat sum of around $100 million, underlining its assertive expansion strategy.
The company did receive some blows during the period, with net income and diluted earnings per share declining by approximately 19% and 16%. However, this did not deter Buffett from entering the homebuilder market, making D.R. Horton his largest new position.
Given the absence of U.S. housing inventory, homebuilders like D.R. Horton present an enticing value proposition. Berkshire scooped up nearly 6 million shares, translating to a hefty investment of about $726.5 million. As analysts at Citi place D.R. Horton on an upside 30-day catalyst watch, the company continues to emerge as a well-equipped market leader, poised to navigate and capitalize on market challenges and opportunities. With shares trading at a mere 9.2 times forward earnings, this seems like a page out of Buffett's classic playbook.
Lennar
Lennar Corp. (LEN, Financial), another prominent U.S. homebuilder, has certainly caught the investment community's attention this year. With a year-to-date return of nearly 27%, the stock stands out amidst the market's ebb and flow.
Berkshire's investment in the company, though modest by Buffett's standards at 152,572 shares of Lennar's Class B preferred stock, which is valued at around $17.2 million, signals a bullish undertone on the homebuilding sector.
Diving deeper into its recent financials, Lennar reported second-quarter revenue of $8.05 billion, reflecting a decline of about 4% year over year. However, its net income took a more substantial hit, plunging 34% to $871.7 million. Moreover, its diluted earnings stood at $3.01 per share, dropping by 33%. While these figures might raise eyebrows, it is important to note that Lennar's earnings still beat expectations by 27%. This indicates that, despite the challenges, the company is navigating the market more adeptly than anticipated.
Lennar's position is intriguing in light of recent housing trends and positive sentiments around homebuilder stocks – like the unexpected surge in housing starts and the resilience of new home sales against rising mortgage rates. The influx of individuals into disaster-prone areas, hunting for affordable homes, may provide an avenue for Lennar to capitalize upon. With housing prices on the rise and as Raymond James notably upgrades its stance on homebuilders like Lennar, investors might want to keep a keen eye on how this company's narrative unfolds in the coming quarters.
NVR
Navigating the shifting market expectations with finesse, NVR Inc. (NVR, Financial) has emerged as a noteworthy contender in the homebuilding sector with a year-to-date return of approximately 33%.
Berkshire Hathaway added 11,112 shares of NVR to its portfolio in the second quarter, representing an investment valued at roughly $70.6 million. This move aligns with Buffett's time-honored strategy; he is no stranger to playing the field by investing in multiple companies within the same market. While this approach is for diversification at times, on other occasions, Buffett narrows his focus to only the most promising players.
As the broader economy experiences economic crosscurrents, NVR's performance was impacted. The company's earnings announcement on July 25 disclosed revenue of $2.38 billion, a decline of 11% year over year. Nevertheless, a net profit margin increase to 17% proves the company is optimizing its operations efficiently. On the other hand, its net income settled at $404 million, sliding 7% from the previous year. Operating income also decreased 18% to $477.8 million. However, earnings per share topped expectations by 27%, indicating that not all metrics are on a downtrend.
Notably, despite the slight increase in mortgage rates, the demand for new homes remains high. This resilient backdrop and the decrease in long-term mortgage rates showcase a favorable terrain for companies like NVR. As one of the top five U.S. homebuilders, the new addition to Berkshire's portfolio could be seen as a vote of confidence in NVR's long-term potential.
