Where is Warren Buffett channeling most of Berkshire Hathaway's (BRK.A +0.85%) (BRK.B +0.86%) money these days? U.S. Treasury bills. Berkshire's investments in Treasurys totaled nearly $122 billion at the end of the second quarter.
Buffett was also a net seller of stocks in Q2 to the tune of close to $8 billion. This, combined with the large Treasury bill stockpile, provides a big clue that the famous investor doesn't think there are many attractive stocks to buy these days.
However, "many" doesn't mean "any." The Oracle of Omaha has identified a handful of stocks that he likes. I think one of them especially stands out. Buying this Buffett stock could be a brilliant move right now.
Buffett's new interest
Buffett initiated only three new positions for Berkshire in the second quarter. They shared one glaring common denominator: All three were the stocks of homebuilders.
Berkshire's portfolio now includes stakes in D.R. Horton (DHI +1.84%), NVR, and Lennar Group. It seems obvious which one of the three Buffett likes the best. Just look at Berkshire's position sizes. At the end of Q2, the conglomerate's stake in D.R. Horton was worth over $726 million compared to nearly $71 million in NVR and only around $17 million in Lennar Group.
I think Buffett is onto something with his new interest in homebuilders, especially D.R. Horton. It's not surprising that this stock has already been a huge winner so far in 2023.
NYSE: DHI
Key Data Points
D.R. Horton ranks as the largest homebuilder in the U.S. based on volume. It's held that top spot for more than two decades. The company has leading market shares in all of the top five markets in the U.S. And it builds homes across the price spectrum, from starter homes to luxury homes.
Three big pluses
There are three big pluses for D.R. Horton that make the stock a compelling buy, in my view. I suspect that Buffett thoroughly analyzed all of them before investing in the homebuilder.
1. Housing shortage
The U.S. needs more houses. Nonprofit housing equity advocacy organization Up for Growth estimates that the U.S. needs an additional 3.8 million homes to meet its housing needs. Jeffery Hayward, chief administrative officer for Fannie Mae, the top provider of mortgage financing in the country, believes that "the only way out of the supply crisis is to create more housing and preserve the affordable housing we already have."
This supply demand imbalance creates a huge opportunity for D.R. Horton. What's more, the housing supply crisis is worse in many of the top markets the company serves than it is at the national level.
2. Interest rates
Yes, interest rates have soared. The 30-year mortgage rate recently hit the highest level since 2000. Despite this challenge, D.R. Horton's net sales orders still jumped 37% higher year over year in Q2.
Many economists, though, see a light at the end of the tunnel. The Federal Reserve's aggressive rate hikes are probably over. Goldman Sachs analysts expect rate cuts will be on the way in the second quarter of 2024. If they're right, it should bode well for D.R. Horton.
3. Valuation
You can bet the farm that Buffett closely examined D.R. Horton's valuation relative to its earnings growth prospects before he bought the stock. I'm sure he liked what he found.
D.R. Horton's shares currently trade at a forward earnings multiple of 9.3x. By comparison, the S&P 500 trades at 18.5 times expected earnings. The stock's price-to-earnings-to-growth (PEG) ratio, which factors in projected growth over the next five years, is 0.7. Any PEG value below 1.0 is considered to be an attractive valuation.
A brilliant move
Buffett knows what he's doing by being so cautious about investing in stocks right now. In general, stock valuations are high based on historical standards. But he also knows what he's doing by loading up on D.R. Horton.
The housing supply demand imbalance won't be solved overnight. As the nation's largest homebuilder, D.R. Horton should enjoy strong growth over the next few years. Interest rates will eventually come down, providing an additional catalyst. With those dynamics at work combined with a bargain valuation, I think it's clear that buying this stock truly is a brilliant move right now.
