To The Moon

This news broke in Aug 2023 when Berkshire’s recent investments into a few homebuilders in the USA.

Berkshire invested $814M in US homebuilders

Extract from the news article dated 15 Aug 2023:

Warren Buffett’s Berkshire Hathaway disclosed $814 million in investments across three home builders this week, the Financial Times reported. The move from the world’s most famous investor reflects how builders are capitalizing on this moment of limited supply, even as higher mortgage rates have cast a chill on home sales.Buffett’s biggest focus was on D.R. Horton. Berkshire purchased six million shares in the company, worth roughly $726 million at the end of the second quarter. The investment made Berkshire one of D.R. Horton’s 10 largest shareholders, as it holds 1.8 percent of its stock.Berkshire also purchased more than 152,000 shares in Lennar and 11,000 shares in NVR.

As per the Q2/2023 13F filings, Berkshire has bought the following:

• 5,969,714 shares of DHI

• 11,112 shares of NVR

• 152,572 shares of LEN.B

Given that Berkshire only buys stocks of great companies with a good margin of safety (which I typically assume at 50%). This implies that the 3 homebuilders’ stock prices in Q2/2023 are undervalued by a good margin. Let us look at DHI in detail.

The Q2/2023 stock price range of DHI in Q2/2023 is 94.22 to 124.05. Berkshire has entered their position in Q2. While it is possible, it is unlikely that Berkshire bought the stock at the lowest or highest price. If Berkshire applies a 50% margin of safety, the fair value of DHI could be in the range of 188.44 to 248.10.

DHI closed the day (4pm EDT, 25 Oct 2023) at 100.66. This is not far from the Quarterly low of 94.22. While this can be a good price to enter with a good margin of safety (based on Berkshire’s entry),

Observations of DHI 10 years performance:

• Strong performance of revenue and EPS, that 22.6% and 19.5% growth over 10-year CAGR.

• It has displayed good 10-year median margins in Gross Profits (22.2%). FCF is acceptable at 2.7%.

• The P/E, P/B, P/S ratios look good value at 7.1, 1.6 & 1.0 respectively.

• Over the 10 years (2013 to 2022), it has displayed good growth in:

  Revenue from $6.259B (2013) to $33.48B (2022) - over 5x

  Operating profits $640M (2013) to $7,570M (2022) - over 12x

  EPS from $1.33 (2013) to $16.51 (2022), over 12x

• To understand the fundamentals better, I would suggest looking into details of the balance sheet, cash flow statements and other competitive advantages to qualify.

However, I do have some reservations about some of the technical indicators:

• A death cross looks to be forming in the coming days and is typically bearish. Thus, there is a chance that the stock price can go lower in the coming days.

• The Stochastic indicator suggests a downtrend with a double bottom formation - a potential reversal is possible in the coming days.

• The MACD indicator suggests a reversal into an uptrend.

For me, I suggest researching more on the company and waiting for the completion of the death cross before deciding if there is sufficient risk-reward to take up a position. I continue to have my reservations about the macro environment. Let us do our due diligence.

@TigerStars

$D.R. Horton(DHI)$