The type of stocks an investor has in their portfolio is as important as the individual stock names. In the case of Warren Buffett's Berkshire Hathaway (BRK.A 0.24%) (BRK.B 0.38%), it's clear that he's not afraid of the interest rate cycle. In fact, he may well be investing to take advantage of excessive investor fear over the impact of the tightening cycle. In that line of thought, here are three stocks to consider to invest like Buffett.
Apple
Apple's (AAPL 2.15%) exposure to the interest rate cycle comes from its status as a consumer discretionary company selling relatively high-ticket items. Higher rates pressure consumer spending, including on high-end smartphones, iPads, and Macs. Moreover, spending on Apple products is naturally coming up against tough comparisons from previous years due to the boom in spending on its products caused by the lockdowns in previous years. Together, these pressures added up to a 1.4% decline in year-over-year sales in the recent third quarter, and Wall Street expects Apple's sales to decline 2.8% in 2023.
Image source: The Motley Fool.
But here's the thing. In spite of a challenging smartphone market, iPhone revenue grew on a constant currency basis in the third quarter. In addition, its services revenue (a business that has double the gross profit margin of its products revenue) grew 8.2% to $21.2 billion, representing 26% of overall revenue.
In short, Apple is generating underlying growth in its core iPhone offering and generating high-single-digit growth in its high-margin services segment. With 2 billion active devices and a near doubling of paid subscribers in three years, Apple will likely continue to grow service revenue for many years.
It all sets up the company for a return to top-line growth when the interest rate cycle eventually turns and consumer spending picks up.
Buffett buys housing-related stocks like D.R. Horton
It's always interesting when Berkshire Hathaway initiates new positions, and it's very interesting when it's in homebuilders (the other two were Lennar and NVR) at a time when the housing market is under stress.
The housing market is challenged due to higher interest rates impacting housing affordability (a reading of 92.7 means a median-income family in the U.S. has 92.7% of the income necessary to qualify for the mortgage on a median-priced home, so a lower number means less affordability) and home sales remain weak.
US Composite Housing Affordability Index data by YCharts
Still, when interest rates do eventually start to fall again, the housing market could pick up quickly. There are three metrics in favor of this argument. First, the U.S. homeownership rate remains below long-term historic levels. Second, existing home inventory remains relatively low. Third, even with slowing home sales, the months' supply of existing homes remains low.
US Home Ownership Rate data by YCharts
Of the three bought by Berkshire Hathaway, I think D.R. Horton (DHI +1.04%) is the most interesting. Not only was it the largest position taken (worth around $687 million at the time of writing), but it's also trading at a reasonable price-to-book value -- a useful metric for homebuilders as it accounts for homes in construction and land inventory.
DHI Price to Book Value data by YCharts
In fact, as of the second quarter, D.R. Horton had $8.5 billion in land inventory compared to $9.5 billion in construction in progress and finished homes. With such a high land bank relative to homes in construction, D.R. Horton can ride out a weak period of sales and be in good shape for the prospective upturn.
Louisiana-Pacific
In common with D.R. Horton, engineered wood siding and oriented strand board (OSB) company Louisiana-Pacific's (LPX +0.65%) prospects are tied to the housing market. Its primary end markets are new residential construction and repair and remodel activity. Not only is it a cyclical play on a recovering housing market, but there's also a long-term structural growth story coming from engineered wood winning market share from wood and other less environmentally friendly materials used in siding. Louisiana-Pacific uses sustainably sourced trees.
In addition, OSB continues to win market share over plywood, and Louisiana-Pacific also has a growth opportunity from expanding sales of its higher-value structural solutions as part of its OSB volume as it moves away from commodity OSB products. All told, the Berkshire Hathaway investment is an excellent way to play a housing recovery.
