Warren Buffett is widely regarded as one of the most successful investors of all time. His company, Berkshire Hathaway (BRK.B), owns a diversified portfolio of stocks, ranging from technology giants like Apple (AAPL) and Amazon (AMZN) to consumer staples like Coca-Cola (KO) and Kraft Heinz (KHC).
However, in the second quarter of 2023, Buffett and his team made some noteworthy moves in the stock market. Berkshire reduced its overall equity exposure by selling shares of some of their top holdings, such as Bank of America, Chevron, and Verizon - and even scaled back their own share repurchases. But Buffett's firm also bought shares of three homebuilder stocks during Q2: Lennar (LEN), NVR (NVR), and D.R. Horton (DHI).
Why would Buffett invest in these homebuilder stocks, despite a challenging market with mortgage rates lingering near 22-year highs? Buffett may see value in these stocks, as they trade at low price-to-earnings ratios and have strong growth prospects - and moreover, the billionaire may anticipate a rebound in the housing market, as the demand for new homes remains high and the supply of existing homes is low.
Here's a look at all three stocks right now, and what investors can glean from Buffett's buy-in.
Lennar: A Leader in the Homebuilding Industry
Lennar Corporation (LEN) is one of the largest and most diversified homebuilders in the U.S., with a strong market share, a wide geographic presence, and a focus on quality and innovation. The company operates in 21 states and offers a variety of products, ranging from single-family homes to multifamily communities.
Lennar's stock has been on a roll in 2023, up by 31.6% year-to-date to beat the S&P 500 Index ($SPX), which has gained about 16%. That said, it's worth pointing out that housing stocks have outperformed as a group in 2023; for perspective, the S&P Homebuilders SPDR (XHB) is up 36% since the start of the year.
In June, Lennar reported outstanding earnings for Q2 2023 that surpassed analysts' expectations. They delivered 17,074 homes (up 3% YoY) and received 17,885 new orders (up 1% YoY). Home sales revenues rose by 5% to $7.7 billion, with net earnings reaching $1.2 billion, up by 9%. Gross margin improved to 22.5%, and net margin hit 15.8%.
The good news doesn't stop there. Lennar's valuation and growth metrics shine in comparison to its peers. The stock's trailing 12 months price/earnings (P/E) ratio of 7.52 and forward P/E of 9.54 are both lower than industry averages.
Among analysts, the average price target for Lennar’s stock is $135.33, which implies an upside potential of about 15% from current levels. The consensus moderate buy recommendation is based on 15 analysts offering ratings. Among them, seven analysts suggest a strong buy, two analysts suggest a moderate buy, four analysts suggest a hold, and two analysts suggest a strong sell.
Plus, if you're looking for that Berkshire-style passive income out of your housing stocks, take note: LEN offers a 1.28% dividend yield to shareholders.
NVR: A High-Margin and Low-Risk Business Model
NVR, Inc. is a homebuilder operating under brands like Ryan Homes, NVHomes, and Heartland Homes. They also offer mortgage banking and title services to homebuyers. What sets them apart is their strategy of building homes on land they don't own, which reduces capital requirements and market risk.
In terms of stock performance, NVR is up 38%, outpacing not only the S&P 500, but also the XHB - despite the stock's significantly high per-share price, which could be a very real barrier to entry for non-Buffett investors.
In Q2 2023, NVR beat earnings expectations as the company delivered 5,883 homes (up 9% YoY) and received 6,016 new orders (up 7% YoY). Homebuilding revenues rose 10% to $2.3 billion, with net income up 16% to $404 million. EPS was $116.54, beating estimates by 15.41% - despite pressure from lower home prices and higher selling expenses.
Analysts expect NVR's bottom line to stay under pressure going forward, too. Consensus estimates call for Q3 EPS of $113.01, a 4.64% decrease YoY, and FY 2023 EPS of $440.88, a 10.36% decrease YoY.
NVR’s analyst ratings are neutral, with a consensus hold recommendation based on the five analysts offering ratings. Among them, two suggest a strong buy, two suggest a hold, and one suggests a strong sell. Plus, the average price target for NVR’s stock is $6,416.67, which implies expected upside of less than 1% from current levels.
NVR’s strategic company moves appear to be limited, as the company has not announced any major acquisitions, expansions, or innovations in the recent past. The company has maintained its focus on its core business model of building homes on land that it does not own, which has enabled it to generate high margins and low risk.
However, this also limits its growth potential and market share, as it depends on the availability and quality of land from third-party developers.
D.R. Horton: A Value-Oriented, Customer-Centric Approach
D.R. Horton is a homebuilder that prioritizes affordability and customer satisfaction, catering especially to first-time and entry-level buyers through its D.R. Horton, Emerald Homes, Express Homes, and Freedom Homes brands. They also offer mortgage banking and title services.
DHI has gained 31.5% YTD, outperforming the S&P 500 - but, as with LEN, it's still narrowly lagging the housing-focused XHB.
In Q2 2023, DHI reported record revenues and earnings that exceeded expectations. The company delivered 24,463 homes (up 35% YoY) and received 27,059 new orders (up 35% YoY). Homebuilding revenues surged by 42% to $7.3 billion, with net income reaching $1 billion. EPS for the quarter was $3.06, a substantial increase from the previous quarter and a pleasant surprise for analysts.
Analysts expect DHI to grow its bottom line going forward. Consensus estimates call for EPS of $3.97 for Q3 (a 14.99% increase YoY) and $13.27 for FY 2023 (a 19.62% increase YoY).
Analyst ratings lean positive overall, with a moderate buy consensus based on 18 analysts in coverage. Nine suggest a strong buy, one recommends a moderate buy, seven recommend holding, and one advises a strong sell.
The average price target is $144.19, which implies expected upside of more than 23% from current levels.
D.R. Horton's stock is on the upswing, driven by strong earnings and Buffett's interest. Their focus on affordability and innovation makes them a compelling choice in the homebuilding sector, and they also offer a decent dividend yield of 0.88%.
What Does This Mean for Investors?
It appears that Buffett might see these stocks as hidden gems in the market, and his move into this sector likely hints at his confidence in the housing market's long-term strength. And while the year-to-date relative strength in many housing stocks is certainly compelling, the lingering risks associated with a hawkish Fed and an inflation-strapped consumer may still be too much for the average non-billionaire investor to bear.
That said, for investors looking to follow Buffett's lead into homebuilding - at a somewhat smaller scale, given the current environment - Lennar stands out among this trio with its promising growth prospects, solid dividend yield, attractive operational metrics, and favorable analyst ratings.
On the date of publication, Ebube Jones did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
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