Berkshire Hathaway has built an almost 10% stake in homebuilder Lennar, buying nearly 2.7 million shares over three trading days as the stock struggled with weak earnings and rising mortgage rates. Lennar shares jumped as much as 6.6% on the news, even though the stock remains down more than 32% over the past year.
Berkshire Hathaway bought almost 2.7 million Class A shares of Lennar over three trading days ended Monday, bringing its position to 23.7 million shares worth $1.8 billion, according to a securities filing. The Omaha-based conglomerate also holds 528,000 of Lennar's Class B shares, each carrying 10 times the votes of a Class A share.
Lennar shares surged as much as 6.6% on Tuesday, touching a high of $83.24. The Miami-based homebuilder has still plunged more than 32% over the past year.
Homebuilders squeezed by rising rates
Berkshire's purchases came as rising interest rates hurt homebuilders by pushing up 30-year mortgage rates and dimming affordability. The nationwide average 30-year fixed mortgage rate reached 6.95% last week, up from 6.76% the prior week and 6.26% a year earlier, according to Freddie Mac. The State Street SPDR S&P Homebuilders ETF has fallen almost 16% since the end of June.
According to CFRA Research analyst Catherine Seifert: "Berkshire likes to buy undervalued assets", describing the Lennar position as a classic value bet for the conglomerate. The move isn't a stretch for current Berkshire CEO Greg Abel, who took over last year from Warren Buffett.
Berkshire already has a significant presence in homebuilding after acquiring Taylor Morrison, and it also owns paint maker Benjamin Moore and roofing manufacturer Johns Manville. In 2003, Berkshire bought manufactured-home maker Clayton Homes for almost $2 billion.
Lennar's weak quarter
Lennar reported weak fiscal third-quarter results last week, with earnings per share of $1.23 missing the consensus estimate of $1.29, while revenue slumped 8% from the same period a year earlier. The company also forecast fourth-quarter guidance below expectations, citing affordability challenges from rising interest rates.
On the earnings call, Lennar CEO Stuart Millar said 30-year mortgage rates at 7% constrain affordability and reduce the pool of qualified buyers. A shortage of new housing supply is pushing up the price of existing homes, and higher mortgage rates have priced millions of first-time buyers out of the market altogether.
A contrarian bet from new leadership
Berkshire's deep-value investing philosophy often veers toward the contrarian, and the tough housing environment could provide targets for the conglomerate, which sat on a war chest of some $367 billion at the end of June. The stake-building also comes days after Warren Buffett officially stepped down as Berkshire chairman on Friday, succeeded by his son Howard Buffett.
Source: SEC filing
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