Warren Buffett Bought 5 Stocks in Q2. Here's the Best of the Bunch.

We already knew that Warren Buffett wasn't a big buyer of stocks in the second quarter of 2023. Berkshire Hathaway's (BRK.A -0.76%) (BRK.B -0.69%) Q2 update last week revealed the conglomerate was a net seller of stocks to the tune of nearly $8 billion. 

Buffett (through Berkshire) completely exited three positions and reduced Berkshire's stake in five stocks. But he wasn't totally focused on selling. Buffett bought five stocks in the second quarter.

And one stands out as the best of the bunch.

Stocks Buffett bought

Buffett initiated new positions in three stocks in Q2:

Data source: Berkshire Hathaway 13F filing.

He also added to two existing positions in Berkshire's portfolio:

Data source: Berkshire Hathaway 13F filings.

Buffett's addition of more shares to Occidental was his least surprising move in Q2. Berkshire now owns a 25.3% stake in the oil producer. It secured regulatory authorization last year to buy up to 50% of Occidental.

Berkshire first initiated a position in Capital One in the first quarter of 2023. In the past, he started out with a smaller position in a given stock and then added more shares in subsequent quarters, just as he has done with Capital One.

The new positions in D.R. Horton, NVR, and Lennar have one striking thing in common: They're all homebuilders. It appears that Buffett is now a fan of housing stocks. 

How they stack up

Buffett's primary considerations when he buys a stock are valuation and earnings growth prospects. So how do the five stocks he bought during Q2 stack up on these two fronts?

The forward price-to-earnings (P/E) ratio is a commonly used metric for assessing the valuation of a stock. Here's how these stocks rank based on forward P/E:

Data source: Yahoo! Finance.

Evaluating the earnings growth prospects of the companies is more difficult because there are several variables involved. These variables include interest rates and other macroeconomic conditions.

However, D.R. Horton, Lennar, and NVR should have strong long-term growth prospects. The U.S. doesn't have enough housing supply to meet demand. That bodes well for the three homebuilders Buffett bought in Q2. 

Capital One still faces some lingering effects of the banking crisis earlier this year. Moody's even recently shifted the outlook for the bank from stable to negative, in part because of its exposure to corporate real estate holdings. Capital One should be fine over the long run, but I suspect that its growth over the near term could be constrained.

Occidental's earnings growth hinges largely on oil prices, which can fluctuate significantly. Buffett clearly believes that the demand for oil and gas will be strong enough to support solid growth for the company. Occidental could also have a big opportunity with its initiative to build direct air capture facilities that suck carbon from the air.

The best of the bunch

In my view, Buffett's bets on each of these five stocks could pay off over the long term. However, I think that one of them is the best pick. The winner, in my opinion, is D.R. Horton.

The company has been the biggest in the homebuilding business in the U.S. since 2002. I like that D.R. Horton focuses on the entire range of homes, from entry-level to luxury. Even with higher mortgage rates, the company's net sales orders soared 37% year over year in its latest quarter. 

You might have noticed that D.R. Horton is the most attractively valued of the three housing stocks Buffett bought in Q2. That's especially notable, considering that it has also been the biggest year-to-date winner of the group.

DHI data by YCharts

I fully understand Buffett's hesitation in buying a lot of stocks in the current market environment. The valuations of many stocks are hard to justify. However, he obviously thinks that D.R. Horton is an exception. And as is often the case, Buffett is probably right.