Warren Buffett has accumulated tremendous wealth for both himself and Berkshire Hathaway ( BRK.A -1.26%) ( BRK.B -1.40%) shareholders by consistently tuning out Wall Street’s prevailing opinions. He’s never shied away from taking a contrarian approach, prioritizing the purchase of high-quality businesses at reasonable valuations. Many of his most successful investments have been made when others were selling, allowing him to buy at attractive discounts.
Although Buffett has found limited appeal in the current stock market, he did acquire modest positions in 10 companies last month. Notably, one of these picks isn’t favored by Wall Street—15 out of 21 analysts rate the stock a hold, and the median price target sits 13% below its present value as of this writing.
Buffett, however, may have insights the analysts lack. At the very least, his long-term perspective enables him to look beyond immediate headwinds.
Image source: The Motley Fool.
Buffett is accumulating shares in this construction company
Berkshire Hathaway exercised its right to keep several new holdings confidential during the first quarter, omitting them from its quarterly 13F submission to the SEC. However, last month’s filings unveiled all the fresh positions Buffett and his team have taken. Among these is Lennar ( LEN 2.67%) ( LEN.B ), a homebuilding company.
Lennar is the second-largest homebuilder in the U.S., behind only D.R. Horton ( DHI 2.89%), which Buffett also added to his portfolio in the first quarter. The home construction sector has been under pressure because high housing costs have pushed buyers out of the market. In August, homebuilder confidence dropped to a level of 32, marking its third-lowest point since 2012 and extending a 16-month streak in negative territory.
NAHB/Wells Fargo US Home Builder Confidence Index data by YCharts
Lennar and D.R. Horton are contending with several challenges. The average interest rate for a 30-year conventional mortgage has stayed between 6.5% and 7% throughout the year. Simultaneously, home prices remain high, making housing less affordable than ever before.
On top of that, rising economic uncertainty has prompted more Americans to be cautious with their finances and postpone major purchases like homes. As a consequence, the number of homebuyers in the U.S. fell to its lowest in over a dozen years—excluding the onset of the COVID-19 pandemic—according to data from the Multiple Listing Service and Redfin.
Given these conditions, homebuilders have only one option to drive sales: accept lower profits. In the past year, Lennar and D.R. Horton’s gross margins have narrowed by 460 and 260 basis points, respectively. On top of this, both companies reported revenue declines of about 7% last quarter.
With declining financials and a bleak industry outlook, it’s no surprise Wall Street has turned bearish on these stocks. Lennar’s share price is currently 28% below its all-time peak reached in late 2024, even after rebounding and benefiting from Berkshire’s investment disclosure. D.R. Horton’s performance is somewhat better, but its shares are still down 14% from their highest level.
What could Buffett recognize that Wall Street overlooks?
Lennar has been constructing homes since 1954, so it has weathered numerous market downturns. Historically, Lennar prioritized protecting its margins, even if that meant sacrificing sales volumes. While this approach produced solid earnings during tough periods, it may not have been the optimal strategy for sustainable growth.
During Lennar’s latest earnings call, executive chairman and co-CEO Stuart Miller noted, "We learned through those times that once we step backwards and lose momentum, it becomes increasingly more difficult to restart and recapture volumes."
This is significant because the U.S. is still facing a major housing shortage, and the gap is widening. Zillow estimates that in 2023, there were 4.7 million more American households seeking homes than there were available properties. This translates to ongoing opportunities for Lennar to continue building and catering to demand. The company has recently shifted focus toward entry-level homes and provides incentives like mortgage rate buy-downs to improve affordability.
By maintaining its sales volume, Lennar positions itself to eventually grow its margins as it scales and improves efficiency. Management believes profit margins are close to bottoming out.
Once interest rates decline and the economic outlook stabilizes, more buyers should re-enter the market, and Lennar won’t need to offer as many incentives. Margins and revenues are likely to recover, though this could take several years.
Many analysts tend to concentrate on forecasts for the next year, so their price targets reflect short-term expectations. It’s true Lennar is currently in a challenging environment and doesn’t anticipate much improvement in the near term.
However, Buffett has always favored a much longer investment horizon. Lennar is well positioned to benefit from persistent housing demand over the long run, as the nation’s housing shortage remains unresolved.
With this outlook, Buffett has seized the chance to buy Lennar shares at a compelling value. Investors still have an opportunity to pick up Lennar stock at just 1.8 times tangible book value. While this is slightly above its historical average, Lennar has reduced the land assets on its balance sheet, instead relying on options contracts to retain greater flexibility. This shift justifies a premium to its typical valuation.
