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Buffett is Right Again about the Housing Market

By: MarketBeat

October 24, 2023 at 09:47 AM EDT

Buffett stocks

Is Warren Buffett ever wrong? If you are sighing at the fact that you hesitated to buy construction stocks due to tales of doom and gloom, then today is your lucky day, as MarketBeat is bringing you yet another way to measure this market more clearly and maybe even ride the rest of the wave higher.

Earnings season can bring you vast data and trends that you can trace back to the bigger picture, so you don't miss the forest by focusing on one or even a few trees. With two companies supporting the real estate sector, mainly construction and renovation, announcing their earnings this week, the writing is now on the wall.

PulteGroup (NYSE: PHM) is one of the 'comparable' companies like those Buffett bought last quarter in his bet for a sustained boom in construction. If you still need to catch up on those, here's a list of Buffett stocks that will likely rise before Buffett's holdings take off, just by nature of the industry.

The Votes are In

Pulte stock is up in the pre-market hours of Tuesday morning by as much as 2.4% after reporting on its third quarter 2023 earnings results, but more on their importance in a bit.

Another company that provides a great indicator of spending activity for housing, whether new homes or renovation activity, has also entered the chat. Sherwin-Williams (NYSE: SHW) is another stock that is popping off in the pre-market session, this one by a more significant 3.1%.

This reaction also comes from the quarter's earnings results. The sentiment around the facts and figures can be taken as a vote of confidence from markets expecting an even longer booming cycle in the industry despite the real estate market being in bearish territory.

The Vanguard Real Estate ETF (NYSEARCA: VNQ) is trading at 61% of its all-time high prices and hitting a fresh 52-week low as real estate market enters into Wall Street's definition of a bear market. Defined a discount of 20% or more from all-time - or recent - highs.

So, how come markets are still excited around these names that obviously depend on the health of the real estate sector? According to economic data, namely housing starts, activity is heading nowhere but up, despite what you may hear around the neighborhood or on the TV screen.

Can't Fight the Numbers

Remember the days when supply chain bottlenecks caused the price of virtually everything to go up? Well, things are looking up for many players as prices begin to normalize. One benefactor in particular is Sherwin-Williams.

Management reported a year-on-year gross margin expansion of 490 basis points, which is a fancy way of saying 4.9%. Ending the quarter with a 47.7% gross margin places the company back on industry-leading status due to its size and pricing power.

Other company financial factors will keep you on the edge of your seat, such as a 12.6% jump in earnings per share, but wait, there's more. Net operating cash flow, the lifeblood of any business, "more than doubled" to $1.3 billion!

Pulte? They also saw a respectable 8% increase in earnings per share for their year-on-year observation. Recall the bears screaming for a housing market freeze/collapse, right? Is that why closings rose to 7,076 with a 2% higher average sales price? So much for a freeze.

The easing supply chains also benefitted costs for building homes and labor paid for doing so, so gross margins expanded to the second-highest level in five years, at 29.5%.

Following that momentum, with the confidence of a 43% jump in new orders with a $3.8 billion value, Pulte management made a decision not too far away from the one made at Sherwin-Williams.

If you had access to a company's ins and outs, all the financials and inside trends, and believed the stock to be cheap today and due for a rally, would you buy it? If the answer is yes, you understand why insiders have been buying both stocks.

Sherwin-Williams bought back as many as 2.7 million shares, placing their vote of confidence in the stock's future. Pulte was not too far away; these magnates bought back $300 million worth of stock for a total of 12.6 million shares; note that this amount represented close to 2% of the company's market capitalization.

All told, these two names, plus Buffett's willingness to invest in the sector, should give you the confidence that the potential upside still needs to be priced in. Still shaky? Check out analyst targets, shooting for a 17.3% and a 21% upside for Sherwin and Pulte, respectively.

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Buffett is Right Again about the Housing Market

The Votes are In

Can't Fight the Numbers

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