Do you think stocks are getting expensive? You could be right. One key valuation metric -- the S&P 500 Shiller cyclically adjusted price-to-earnings (CAPE) ratio -- is at its highest level since early 2022 when the market began to tank.
But not every stock is priced at a nosebleed level. You can find several good picks in Warren Buffett's Berkshire Hathaway portfolio. Here's one ridiculously cheap Buffett stock to buy hand over fist right now.
Building profits
Buffett (or one of Berkshire's two other investment managers) initiated a small position in Lennar (LEN 3.00%) last year. At the same time, Berkshire also bought shares of two of Lennar's rivals -- D.R. Horton and NVR. Although Buffett exited the stake in D.R. Horton in the fourth quarter of 2023, the other two homebuilder stocks remain in Berkshire's portfolio.
NYSE: LEN
Key Data Points
Lennar has been in the homebuilding business since 1954. The company also now builds multifamily rental properties. It offers mortgage financing, title and closing services, and originates mortgage loans for commercial real estate properties as well.
Business is booming for Lennar. The company's earnings jumped 21% year over year in its first quarter ending Feb. 29, 2024. Total revenue increased 13%. Lennar's new orders for homes soared 28%. Its backlog at the end of the quarter stood at 16,270 homes with a total value of $7.4 billion.
Why buy Lennar stock right now?
Lennar's dirt-cheap valuation is one reason to buy the stock now. The homebuilder's forward earnings multiple is only 11.35. By comparison, the S&P 500 trades at nearly 21 times forward earnings.
The company has a massive $5 billion cash stockpile. Lennar has used its strong cash position to reward shareholders. It recently raised the quarterly dividend from $1.50 to $2 per share and increased the stock buyback program by $5 billion.
In Lennar's recent earnings call, Executive Chairman and co-CEO Stuart Miller listed several factors that he said are "most often the foundation of a very strong housing market." This list included low unemployment levels and strong consumer confidence.
The U.S. continues to face a housing shortage, especially for working-class families. Lennar is working to help address this issue by scaling up its build-to-rent and single-family for-rent operations.
Federal Reserve officials still expect interest rate cuts in 2024. In Lennar's Q1 earnings call, Miller said that when those rate cuts come the company "believe[s] that pent-up demand will be activated." He added, "[W]e will be well positioned and well prepared."
A few caveats
Lennar does face some challenges. In particular, higher interest rates and inflation are causing new home prices to be too expensive and saving for down payments too difficult for many Americans.
The company's multifamily segment continues to post operating losses. Its other ancillary businesses are also losing money.
Some worry that the Fed won't cut interest rates this year because inflation remains stubbornly high. If rates aren't reduced, it could dampen Lennar's growth.
Despite these concerns, I think the overall positives for Lennar far outweigh the negatives. In a stock market loaded with high-flying expensive stocks, Lennar is a high-flying cheap stock.
