Berkshire Hathaway Just Bought $212 Million of This Beaten Down Stock in 3 Days, and Its Stake Has Increased 81% This Quarter
Key Points
Greg Abel has found new ways to deploy Berkshire's capital since taking over as CEO at the start of the year.
He's invested billions in this beaten-down industry since the start of the year.
His most recent investment looks like a classic Warren Buffett purchase.
Warren Buffett turned over the chief executive officer position at Berkshire Hathaway (NYSE: BRKA) (NYSE: BRKB) to Greg Abel earlier this year, leaving him in charge of the company's $700 billion or so of investable assets between stocks and Treasury bonds. That's a monumental task for Abel, who has leaned on Buffett's for advice so far, as well as longtime Berkshire investment manager Ted Weschler, who controls about 6% of Berkshire's portfolio.
While Buffett found very few investment opportunities for Berkshire during his last few years in charge of the portfolio, Abel has managed to deploy a significant amount of capital in both new marketable equity positions and complete acquisitions. Abel initiated a major investment in Alphabet in the first six months of his tenure. He also completed the purchase of homebuilder Taylor Morrison.
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While we usually have to wait for quarterly reports to learn about the latest moves in Berkshire's portfolio, recent Securities and Exchange Commission filings revealed another big move Berkshire Hathaway is making, including purchases totaling more than $212 million in just three days.
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Betting on a big turnaround
During the past few months, Berkshire built up its position in Lennar (NYSE: LEN) (NYSE: LENB). The homebuilder has suffered amid rising interest rates, which have only exacerbated housing affordability. Lennar has had to turn to incentives, such as buying down mortgage rates for customers, to protect volume, but that still hasn't kept sales from dropping.
Total revenue for the company declined 8.7% year over year last quarter. Total homes delivered fell by 3.4%, while the average sales price dropped by 2.9%. Management updated its full-year delivery target to 80,500 at the midpoint, down from 82,500. What's more, the higher incentive offers have narrowed gross margin, pushing it down to just 15.8% from 17.5% a year ago.
The stock sold off significantly after reporting those results. That's when Abel and Weschler decided to take their stake above 10%, buying nearly 2.5 million shares over the next three trading days following the report. Overall, Berkshire has added nearly 11 million shares of the stock since the end of the second quarter, boosting its stake by 81%.
Abel and Weschler are following the age-old investment philosophy laid out by Buffett: Be fearful when others are greedy, and greedy when others are fearful. It's safe to say most investors don't want anything to do with housing right now. But for a long-term investor, it could present a significant turnaround opportunity.
Is housing a smart investment right now?
Despite the challenge of housing affordability, the U.S. still faces a severe housing shortage. Estimates put the number between 2 million and 5.5 million units. That's an unsustainable position, and it ultimately favors homebuilders with the scale and resources to develop new housing starts.
That may also be the reason behind Berkshire's purchase of Taylor Morrison. The homebuilder will merge operations with Berkshire's Clayton Homes to take advantage of scale. But Berkshire also owns shares of D.R. Horton, the largest U.S. homebuilder. That's to say Berkshire is betting big on housing, not just Lennar.
Lennar looks like a great value right now. The stock trades close to its tangible book value and at 0.91 times its book value based on its most recent balance sheet. In other words, the market is discounting its assets. The market is acting as if housing starts and unit sales will never bounce back and will continue to decline year after year. That doesn't add up considering the severe housing shortage in the U.S. right now. Overall, Lennar should be able to stabilize and increase revenue over the long run while expanding its gross margin as the supply and affordability issues abate.
Adam Levy has positions in Alphabet. The Motley Fool has positions in and recommends Alphabet, Berkshire Hathaway, D.R. Horton, and Lennar. The Motley Fool has a disclosure policy.