FRI, AUG 18, 2023

WARREN BUFFETT WATCH

Berkshire buys homebuilders even as rates rise

In a move that's being called "counterintuitive" and "bold," Berkshire Hathaway added three homebuilder stocks to its portfolio this spring even as rising mortgage rates were keeping many homebuyers, and even sellers, on the sidelines.

Of the three, industry leader D.R. Horton was, by far, the biggest purchase. Berkshire bought nearly six million shares now worth a bit more than $700 million.

It bought much smaller positions in Lennar ($18 million) and NVR ($68 million.)

The total of $780 million in current value for the three stocks is just 0.2% of our $350 billion estimate for the company's equity holdings, an indication that the decision to buy was made by one of Berkshire's portfolio managers and not by Buffett himself who usually deals with much larger numbers.

Investors initially followed Berkshire's lead, bidding up the price of the stocks after the company's portfolio snapshot was filed with the SEC after Monday's closing bell, but then lost ground as mortgage rates moved "solidly" above 7%.

Week-to-date chart: DR Horton -4.6%, Lennar -4.9%, NVR -1.3%

The "counterintuitive" part, however, is that homebuilder stocks have, at least so far, rallied this year despite high interest rates.

There are not a lot of existing homes on the market right now as would-be sellers sit tight, holding onto mortgage loans they got when rates were lower.

As a result, new construction is the only option for many buyers.

Year-to-date: DR Horton +31.6%, Lennar +29.3%, NVR +31.8%

CFRA analyst Cathy Seifert tells The Wall Street Journal that Berkshire, whose real-estate brokerage business suffered a $50 million drop in net income during the second quarter compared to the same period last year, may be trying to offset that weakness by investing in homebuilders.

"Because of their real-estate services and some of their manufacturing business, they have a good pulse on what's going on in the housing market. It's an interesting hedge to the Berkshire real-estate services group that has been hurt by limited supply."

GM stake reduced for second straight quarter

Homebuilders are coming in, but a big Detroit automaker appears to be on its way out.

Berkshire cut its stake in General Motors by 45% during the second quarter, selling 18 million shares with a current market value of almost $596 million.

It's the second consecutive quarter the stake has been reduced. It is now down 56% from the end of last year and has been cut by more than 72% from its peak in the summer of 2020.

The Detroit Free Press notes the automaker is having trouble obtaining battery modules, slowing its efforts to increase production of electric vehicles.

It quotes WedBush Securities analyst Dan Ives as saying, "We believe this is Buffett cutting some of his stake ahead of a potential bumpy EV launch by GM, which we believe will be successful, but will take some time to play out. Warren is still a big believer in the GM story, we believe, despite this move."

(Andrew Bary at Barron's, however, writes that one of the investment managers is probably responsible for the GM position since "Buffett isn't enamored of the highly competitive auto business." In addition, he says the stake has not been "especially profitable" for Berkshire.)

Hummer EV on the production line at the General Motors 'Factory ZERO' electric vehicle assembly plant in Detroit, November 2021. REUTERS/Jonathan Ernst/File Photo

Another analyst, David Whiston at Morningstar Research Securities, tells the newspaper a potential strike by autoworkers may be adding to concerns over the sluggish stock price. "Berkshire has owned it a long time and perhaps they are tired of waiting and the UAW risk made them think: Time to move on."

Also ...

In other moves during the second quarter:

Berkshire added to the Capital One position it started in the first quarter, increasing it by 26% to 12.5 million shares currently valued at $1.3 billion.
A stake in the health care company McKesson that was started in the first quarter of last year and grew to over three million shares was closed out in a third consecutive quarter of selling, with the removal of 2.3 million shares. Current value: $963 million.
Chemical maker Celanese was cut by 39% with the sale of 3.5 million shares now worth $407 million.
Globe Life, a Texas-based insurance company, was reduced by 60% by shedding 3.8 million shares currently valued at $432 million.
Two very small holdings were eliminated: professional services provider Marsh and McLennan ($76 million) and, after just one quarter in the portfolio, Vitesse Energy ($1 million).

Also included in the scoreboard below are several some sizable changes for Activision Blizzard, Chevron, and Occidental Petroleum that had been previously disclosed in earlier filings.

And finally, the stock that wasn't sold. Even though Buffett didn't sound very enthusiastic about Paramount Global when he talked about the media company during the annual meeting in early May, Berkshire didn't touch its stake currently valued at almost $1.4 billion.

To show the effects of just Berkshire's portfolio adjustments, the change in the value of each position was calculated using the June 30 closing price to filter out the impact of stock price moves.

Buffett's mystery donation

Based on a schedule he established years ago, Warren Buffett annually gives billions of dollars' worth of Berkshire shares to the Bill and Melinda Gates Foundation, and to several family foundations.

This year, the shares he donated were worth $4.6 billion, for a total of $50 billion since 2006.

This week, you can add another $25 million, but we don't know who, or what, got it.

In a new SEC filing, Buffett reports he donated 50 Class A shares to a "charitable organization" that was not specifically identified.

At their closing price of $538,107 each on Tuesday, the day of the "transaction," those 50 shares were worth $26,905,350.

Buffett still owns 218,237 Class A shares currently worth almost $117 billion.

BUFFETT AROUND THE INTERNET

Some links may require a subscription

Reuters: BNSF eyes possible settlement, swaps law firms in biometric privacy case

The Canadian Press: B.C.-based Carbon Engineering being bought by Occidental for US$1.1 billion

CNBC Pro (subscription): Top investors say these stock sectors are ‘super cheap’ and Warren Buffett likes them both

Seeking Alpha: I Disagree With Buffett Buying Lennar And D.R. Horton

HIGHLIGHTS FROM THE ARCHIVE

“Warren is very good at doing nothing” (2018)

Warren Buffett says he’s been “semi-retired for decades” and explains why that's been good for business.

BERKSHIRE STOCK WATCH

BERKSHIRE'S TOP U.S. STOCK HOLDINGS - Aug. 18, 2023

Berkshire's top holdings of disclosed publicly-traded stocks in the U.S., Japan, and Hong Kong, by market value, based on today's closing prices.

Holdings are as of June 30, 2023 as reported in Berkshire Hathaway’s 13F filing on August 14, 2023, except for:

Mitsubishi and Mitsui, which are as of June 12, 2023. Tokyo Stock Exchange prices are converted to U.S. dollars from Japanese yen.

The full list of holdings and current market values is available from CNBC.com's Berkshire Hathaway Portfolio Tracker.

QUESTIONS OR COMMENTS

Please send any questions or comments about the newsletter to me at alex.crippen@nbcuni.com. (Sorry, but we don't forward questions or comments to Buffett himself.)

If you aren't already subscribed to this newsletter, you can sign up here.

Also, Buffett's annual letters to shareholders are highly-recommended reading. There are collected here on Berkshire's website.

-- Alex Crippen, Editor, Warren Buffett Watch

900 Sylvan Avenue, Englewood Cliffs, NJ 07632

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