Buffett Bets On Three Of A Kind In $800 Million Public Builder Play

Warren Buffett's Berkshire Hathaway made 2nd quarter 2023 investments totaling more than $800 million in three leading public homebuilding enterprises, making waves, moving markets, and stirring investor speculation and emulation, as the Oracle of Omaha is in the habit of doing.

The big news – disclosed first to the U.S. Securities and Exchange Commission – hit the wires after market close yesterday.

Warren Buffett's Berkshire Hathaway (NYSE:BRK.B) (NYSE:BRK.A) added new holdings in homebuilders D.R. Horton (NYSE:DHI), NVR (NYSE:NVR), and Lennar (NYSE:LEN.B) during Q2 and divested its stakes in McKesson (MCK), Marsh & McLennan (NYSE:MMC), and Vitesse Energy (NYSE:VTS) during the second quarter of 2023, according to its latest 13F filing." – Liz Kiesche, Seeking Alpha

While Berkshire, it was reported here, was a "net seller" of equity holdings during Q2 – divesting about $7.98 billion more shares than it bought – its homebuilder investments represented about 17% of the $4.6 billion it spent on acquiring shares during the second quarter.

Berkshire said that as of June 30, it owned about 5.97 million DR Horton shares worth $726.4 million, about 153,000 Lennar shares worth $17.2 million, and 11,112 NVR shares worth $70.6 million." – Reuters

Broadly on Wall Street, investors and analysts "piggyback" on Buffett's moves because of how often he's right on timing, strategic focus, and picking winning teams. They see a pivot away from marquee tech brands to homebuilding as a bet on both cyclical and secular opportunity, especially given Buffett's preferred practice of taking long-term positions in companies whose shares Berkshire picks up.

Investors closely watch what Berkshire is buying and selling because of Buffett’s reputation as one of the most successful investors of all time. Many investors view Berkshire’s 13Fs as a way to get a sense of how Buffett and his deputies are approaching the markets." – Hannah Miao, Wall Street Journal

Investment in three of the nation's strongest homebuilding enterprise performers, analysts observe, can hedge some of the challenges Berkshire is enduring across its real estate and residential construction portfolio companies. New home construction and development – thanks to a critical mass of existing homeowners latched to historically low mortgage interest rates and staying put in their homes – is on the ascendency, while resales have been hurting.

Deutsche Bank recently released a paper that concluded that the U.S. housing market was simply navigating a mid-cycle crisis last year, and the shortage of housing supply would keep builders busy in the years ahead.

'It is hard to pinpoint exactly how underbuilt the country is, but I firmly believe we are still in an extremely undersupplied housing market, for both new and existing homes, likely for years to come due to development and construction capacity constraints in the industry,' D.R. Horton CEO David Auld told Fortune back in June."– Lance Lambert, Fortune

Yet – beneath the skin and below the broader Wall Street investment narrative -- investments in D.R. Horton, NVR, and Lennar by a player whose Clayton Homes group might be construed to be a direct competitor in many of the markets the three public builders operate in stir interest within the business community of public and private homebuilders itself.

Wolfe Research analyst Truman Patterson writes:

To our recollection, this is the first stake Berkshire has made in a public site-built homebuilder in the past 25 years. However, we remind investors that Berkshire has a long history in “housing” through its acquisition of Clayton Homes in 2003, a mobile/manufactured/modular builder, as well as a handful of Building Products manufacturers and a Real Estate Agency. Through a series of private acquisitions over the past ~decade, Clayton Properties Group has amassed a portfolio of 10 homebuilding brands and expanded into traditional site/stick-built homebuilding, growing into the 8th largest builder in the nation with 11.8K 2022 Closings."

Not to be ignored is the first "what-it-means-to-homebuilders" takeaway from the Berkshire move.

That is, that while public home building peers may ride the coattails of these three industry standard bearers in seeing the, D.R. Horton, NVR, and Lennar prove time and again to be outliers on performance, above and beyond most of the pack. Warren Buffett makes no secret of the fact that he invests in teams of people every bit as much as any other factor, and it's no surprise that, in Horton, NVR, and Lennar, business resiliency, success, and outsized growth opportunity prove themselves, whatever the cyclical or secular forces in play.

Secondly, with its investment in these enterprises, Berkshire is also financially bolstering its high-volume customers, whose purchasing and strategic sourcing teams channel a host of building products, materials, and services the diversified portfolio group produces, distributes, and installs.

The group includes Acme Brick, Benjamin Moore & Co, Johns Manville, Lubrizol, MiTek, and Shaw Industries, not to mention its national network of residential real estate brokerages and insurance agencies.

Most interesting of all might be opportunities for Berkshire's own Clayton Homes enterprise – consisting of the nation's No. 1 manufactured housing producer and a multi-regional network of site- and stick-build homebuilding – to surface as a potential strategic venture partner with organizations like D.R. Horton, NVR, and Lennar, whose business challenge will be to expand the potential homebuyer universe, and who may find Clayton to be a willing and able offsite manufacturing construction-as-a-service ecosystem.

At first glance, taking an investment position in three of homebuilding's best-performing and best-of-breed companies need only work as a financial value generator. The fact is, however, that Berkshire's deep and wide strategic stakes in shelter, evidenced in its majority- or outright-owned subsidiaries, suggest that strategic ventures with homebuilding brands that strive to make the dream of homeownership accessible to more people might well go with the turf.

But isn't this the kind of thing Warren Buffett seems to accomplish as few other investors can or do? Which is to find ways to generate more money and value to Berkshire Hathaway shareholders, and at the same time build sustainable businesses that will continue to grow that money and value.

Our sense is that this will not be the last storyline we'll be following that speaks to further stakes Berkshire Hathaway and Warren Buffett take in the future of housing in the U.S.