Berkshire Hathaway (BRK.B) filed its latest 13F on Monday. It’s become a ritual for investors to pour over the holding company’s quarterly report of buying and selling to understand where Warren Buffett’s head is at regarding stocks and the economy.
In the latest report for the second quarter, Berkshire bought $4.5 billion in stock while selling $8 billion for a net sale of $3.5 billion. That indicates that the Oracle of Omaha is neutral to bearish about the economy.
Three of the holding company’s buys during the quarter suggest precisely the opposite. Berkshire held a combined $814 million at the end of Q2 in three homebuilder stocks: D.R. Horton (DHI), Lennar (LEN), and NVR (NVR). Approximately 89% of the investment is dedicated to DHI.
You could buy some DHI on the news. Analysts are generally optimistic about the stock. Of the 18 that cover it, 10 rate it a Moderate Buy or Strong Buy (3.94 out of 5), with a mean target price of $143.31, 14% higher than its current share price.
You could do that—however, Berkshire’s DHI accounts for just 0.2% of Berkshire’s $356 billion equity portfolio. I don’t think that’s a ringing endorsement of the homebuilder industry.
For this reason, you can hedge your bet by buying a construction-related ETF. Here’s what I had in mind.
If You’re Dead Set on D.R. Horton
D.R. Horton has been the largest homebuilder by volume since 2002. It operates in 113 markets across 33 U.S. states. In fiscal 2022 (September year-end), it closed 82,744 homes, 1% higher than in 2021, generating $31.9 billion in revenue from its home sales.
Regarding profitability and cash flow, it had a net income of $5.9 billion in 2022, 40% higher than a year earlier, with cash flow from its homebuilding operations of $1.9 billion. As a result, its homebuilding leverage in 2022 was 13.2% -- defined as homebuilding notes payable divided by stockholders' equity plus homebuilding notes payable -- the lowest in its history.
There’s no question D.R. Horton is a leader in the industry.
If you’re looking for an ETF alternative that leans heavily on DHI, the iShares U.S. Home Construction ETF (ITB) is for you. DHI accounts for 14.78% of the ETF’s $2.46 billion net assets. Homebuilder stocks account for 64.6% of the fund, with Building Products (14.9%) and Home Improvement Retail (10.4%) having double-digit weightings.
If you’re into options, consider selling Oct. 20 $80 puts. As I write this, the bid price is $1.10. That’s an annualized yield of 6.6%. It’s not huge, but it does provide some income should ITB fail to retreat from $88.15, where it currently trades.
It You’re Open to the Broader Housing Theme
If you look at Berkshire’s holdings, it also owns 4.78 million shares of Floor & Decor Holdings (FND), worth $502.9 million at current prices and accounting for 0.1% of the equity portfolio.
Floor & Decor is a leading specialty wood and stone flooring and accessories retailer. Based in Atlanta, it has 203 warehouse stores and five design studios across 36 states. It’s grown its sales over the past five years from $1.71 billion in 2018 to $4.26 billion in 2022.
FND is a top 10 holding of the SPDR S&P Homebuilder ETF (XHB) with a weighting of 3.70%. Although D.R. Horton doesn’t make the official top 10, it’s only four basis points less in the 13th position.
The ETF tracks the S&P Homebuilders Select Industry Index, an equal-weighted index that rebalances four times yearly in March, June, September, and December.
As a result, homebuilders have a smaller weighting in this ETF at 31.8%. The largest is building products at 46.7%, with home improvement retail in the third position at 11.1%.
Regarding options, I’d be looking at selling Dec. 15 $75 puts. Given the $1.75 bid price, it has an annualized yield of 6.3%, nearly identical to the ITB option from earlier.
Currently trading at $83.32, XHB would have to fall 10% over the next 17 weeks for the shares to be put to you by the buyer.
At the same time, you might buy the June 21/2024 $105 call with a $1.59 ask price. The price would have to rise 28% over the next 311 days to exercise your call. It’s more than possible.
However, with a delta of 0.18474, XHB would only have to increase by $8.61 for you to double your money by selling the put before expiry.
Whether ITB or XHB, it’s a safer way to play Buffett’s bet on the housing market.
Of course, an even safer play might be to buy BRK.B and call it a day.
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