Warren Buffett is one of the most renowned investors of all time, so when he takes a new position, investors tend to take notice. According to Berkshire Hathaway's latest 13F filing, one of Buffett's newest positions is Louisiana-Pacific (LPX -0.55%), putting the spotlight on the siding and wood building products maker.
The stock was up 10% in after-hours trading following the news, indicating that Buffett's buy is leading investors to take a new interest in Louisiana-Pacific. Let's take a look at why Buffett likes the $4 billion company and why it could be a buy going forward.
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Berkshire's bet
A 13F is a form that money managers with over $100 million in assets under management must file within 45 days of the end of each quarter to show their holdings at the end of that quarter. With a portfolio size of $296 billion, Buffett's Berkshire Hathaway is far above this threshold.
Due to both the massive size of Berkshire's portfolio and Buffett's acumen as an investor, the release of Berkshire's 13F is a highly anticipated event each quarter. The 13F for the third quarter of 2022 shows several new buys, including a new position in Louisiana-Pacific. Berkshire bought almost 6 million shares of Louisiana-Pacific for a reported price of $51.19, for a total investment of about $296 million.
While this isn't a huge investment for Berkshire itself, it's a sizable buy, and it makes Berkshire Hathaway a top 10 holder of the Nashville-based company.
Buffett's view on housing?
Louisiana-Pacific sells wood building products, oriented strand board (OSB), and siding, serving home builders, remodelers, and homeowners. Shares are down 26% from their 52-week high as stocks with exposure to the housing market have sold off this year, based on investor concerns that rising mortgage rates and a softening economy will cool demand in the housing market for the foreseeable future.
Buffett is first and foremost a value investor, and he sees that shares of Louisiana-Pacific are very cheap, trading at about 4.5 times earnings. Louisiana-Pacific also looks cheap when looking at its price/earnings-to-growth (PEG) ratio, with a PEG ratio of just 0.9.
Popularized by Peter Lynch, the PEG ratio is a valuation metric that takes a stock's earnings growth into account by dividing its price-to-earnings multiple by its earnings growth. A PEG ratio of under 1 is generally considered to be undervalued, meaning that Louisiana-Pacific looks attractive when using this approach.
It should be noted that earnings per share are projected to fall sharply next year, based on lower housing demand. But even if earnings per share fall 50%, the stock still looks cheap on a relative basis. Buffett is likely looking beyond the short-term headwinds and sees that over the long term, there is a structural need for more new housing in the United States.
A study from nonprofit group Up for Growth says the U.S. has fallen 3.8 million homes short of meeting housing needs, and the National Association of Realtors believes the number could be even bigger, with a shortage of 5.5 million homes. The group says the shortage is so large that it could take up to a decade to close the gap.
The issue stems from the great financial crisis of 2008-2009, in which housing crashed and many homebuilders closed up shop, leading to a decade of less construction. This means that while the housing cycle may be heading lower right now, over the long term, the sector has some powerful tailwinds behind it.
Share buyback machine
Louisiana-Pacific is serious about returning capital to shareholders. It pays a small dividend that yields 1.5%, which added to its incremental appeal to Buffett. But Buffett is a big fan of share repurchases, and that is likely what he likes the most about Louisiana-Pacific -- the company is a share buyback machine.
It bought back $104 million of shares during the first quarter of 2022, $471 million during the second quarter, and $325 million during the third quarter, adding up to $900 million, which is no small sum for a stock with a market cap of $4 billion. The company bought back $1.3 billion worth of shares during 2021. With shares valued so inexpensively, these large-scale buybacks seem like prudent capital allocation by Louisiana-Pacific.
Louisiana-Pacific isn't the type of stock that is going to double overnight or post surging growth numbers. Due to where the housing cycle is, it will probably take a while for this investment to play out. But Buffett is a patient, long-term investor who sees the value here and who sees the structural tailwinds the company should benefit from over the long term. Louisiana-Pacific is buying back a lot of shares and creating value for shareholders, making it an interesting long-term buy for patient investors who want to follow Buffett's lead.
