When you have the successful track record that Warren Buffett does, keeping tabs on what his Berkshire Hathaway (BRK.A -0.31%) (BRK.B -0.10%) is buying and selling can be a successful investing strategy.
Although we don't always have the ability to replicate his trades, the broad strokes that he paints his portfolio with can still be instructive. That's why Buffett buying 5.8 million shares of building materials manufacturer Louisiana-Pacific (LPX 1.09%) worth nearly $297 million is an interesting choice. It's a new position for the Oracle of Omaha, but considering that all the fortune tellers are saying the housing market is about to crash, what does Buffett know that they don't?
Beyond the obvious answer of "probably a lot," let's take a closer look at what, to the casual observer, might seem a contrarian stock pick.
Image source: Getty Images.
Building up a position
Louisiana-Pacific isn't anywhere near Berkshire Hathaway's biggest holding. With the size of the portfolio at over $345 billion, the building materials stock accounts for a paltry 0.1% of the total (though it does represent a substantial 6.7% of L-P's outstanding shares).
Shares of Louisiana-Pacific were down 25% year to date prior to the disclosure of Buffett's purchase. The stock was going for four times trailing earnings, 12 times next year's estimates, and less than five times the free cash flow the building materials company produces. It also traded for just a fraction of its sales and of its projected long-term earnings growth rate -- though at just a 5% compound rate over the next five years, Wall Street isn't seeing the stock going on a rip-snorting run any time soon.
And that could be because, after a decade-long bull run induced by zero-interest-rate Federal Reserve policies, the housing market party seems to be coming to an abrupt end. Louisiana-Pacific might be cheap, but it seems cheap for a reason: The housing industry could be facing a severe and extended downturn.
Housing going into decline
Data from the Mortgage Bankers Association shows mortgage applications are down over 70% from last year, with purchase applications falling more than 41%. The Census Bureau says new home starts in September are down 8.1% from the previous month and are 7.7% lower than a year ago. And housing prices have finally peaked, with the Case-Shiller national home price index down for two consecutive months now.
We're also seeing real estate firms like Zillow and Redfin shutting down their online instant-offer iBuying programs. They're just not seeing buyers in the market that the companies can turn around and sell to.
Constructing a case for leadership
These data points are important to Louisiana-Pacific because it is a leading provider of materials to the new home building market, and to homeowners doing remodeling.
Last year, oriented-strand board (OSB), a plywood-like material used for roofing, sheathing, and underlayment, generated 52% of L-P's revenue, or almost $2.4 billion. Another $1.2 billion, or 26%, came from siding products. OSB sales were more than double 2020's result and three times greater than 2019, while siding's increase was less dramatic but still on an upward trajectory.
Image source: Getty Images.
This year, the slowdown is palpable. While year-to-date OSB sales are only down 6%, in the third quarter they fell off the table, plunging more than 35% from the year-ago period (siding sales are still higher).
Louisiana-Pacific also benefited from wood and lumber product prices that skyrocketed after the COVID pandemic struck. Pricing is still elevated, but well below its July 2021 peak, with industry site McCoy's saying panel costs -- OSB and plywood -- are down 47% from their highs.
It's tough to see the market for Louisiana-Pacific's products improving anytime soon, especially with 30-year fixed mortgage rates now north of 7%. Last year rates were around 3%.
Wait to drop the hammer
Because Buffett is usually the one behind Berkshire's big-money buys -- he's likely responsible for the $4 billion purchase of the Taiwan Semiconductor Manufacturing stake -- it stands to reason the Louisiana-Pacific purchase could be the handiwork of either Ted Weschler or Todd Combs, Berkshire's other two portfolio managers.
That doesn't make Louisiana-Pacific a bad stock to own -- in fact, the building materials stock is a quality company. It's just one that is somewhat cyclical and subject to the winds of a recession in an industry that could be blowing a gale soon.
While the stock is getting a bit of a boost from Berkshire Hathaway establishing a stake in the company, I think investors can wait a bit on following Buffett into Louisiana-Pacific, and can likely get a better price by exhibiting a bit of patience.
