There was some positive data out recently on housing. A Reuters piece reports the highest pending home sales since the home buyer tax credit in April 2010. And the current Kiplinger's (January, 2013) also has some nice graphs and info on recent housing gains (p. 47-51).
A WSJ article noted:
The housing market's revival has had several false dawns in recent years, but a recovery that began in the spring has strengthened throughout the summer and fall. The latest confirmation came on Wednesday, when the Standard & Poor's/Case-Shiller 20-city index showed that prices rose by 4.3% from a year ago in October. Since January, prices are up 6.9% so far this year, the largest year-to-date gain since 2005.
The year-end data is revealing positive signs: rising prices, lower inventory, fewer distressed sales, homeowners rising out of negative equity, etc.
Of course, there may be even more fits and starts, and housing markets vary by region, but the overall upward trend could prompt investors to position themselves for the improving housing picture in 2013.
Turning over stones for overlooked housing plays
Those turning over stones looking for ways to play the improvement in the housing market may have left one obvious one unturned. The consensus of opinion for housing plays in years past might be to look at an ETF or mutual fund that captures some aspect of housing related activity. But the better avenue for the broader activity surrounding the improvement in housing and housing related transactions may not be an ETF or even a sector mutual fund at all.
Investors have already seen run-ups in the obvious plays from housing optimism. Many stocks on the screen related to housing have performed well. Both the ITB and XHB are a bit pricey after recent run ups, for example. And one looking to select a few obvious housing stocks would find they arrived late to the party with many of the obvious beneficiaries like Home Depot (NYSE:HD), Masco (NYSE:MAS) and some of the builders being strong recent performers.
Along with being pricey, many ETFs are too fine of instruments targeting only some aspect(s) of the home sales economy -- like Cement or Lumber (NYSEARCA:CUT); and you'd need others to cover mortgages and related consumer purchases. Fewer capture the full spectrum of materials, financial products and services, and the related genre of consumer spending.
This is because, broadly framed, the home sale (new and existing) can involve many industries and activities: material suppliers, transport, home financing, real estate sales commissions, title services, and direct ripple effects related to other purchases -- especially new furniture, home owner's insurance, housewares, appliances, lawn mowers. There are lots of stones to search under.
The Omaha stone hiding in plain sight
As the title suggests, I am directing my attention to turning over a famous stone hiding in plain sight, Berkshire Hathaway (NYSE:BRK.B). This could be an efficient mechanism to capture the larger impacts of housing market's upswing in new and existing home sales and tap the increased market for goods and services related to increased housing transactions in North America. Some of its exposure to housing is obvious and other aspects are more subtle. These can be found as private firms owned by Berkshire (and subsidiaries thereof) as well as in the portfolio of publicly traded firms.
There are some favorable traits of Berkshire for investors looking for a housing spectrum stock. There are no management fees (beating all the managed funds and even the most rock bottom fee ETFs). Transaction costs are low with a single stock, sparing one the brokerage costs and headache of researching and tracking a few dozen housing-related companies.
Best of all, the well-known conglomerate appears attractively valued. A nice debut article by Christopher Owens on valuing Berkshire is very instructive. Owens looks at the pieces of the Berkshire puzzle and puts together a good case that the stock is favorably priced at present, especially considering the recent news about an improving housing market.
Berkshire may be very well priced relative to the more obvious genre of housing investment. The ITB, for example, shows a P/E of 27 as of this writing and BRK.A is at 16.6. So you pay less for the earnings and get a broader range of businesses and highly touted financial and operational management to boot.
Berkshire offers a unique, broad spectrum of exposure to the larger housing picture, capturing a variety of aspects of the transaction and other related components and services. And if you haven't looked at the portfolio lately, there are some fairly recent additions that make Berkshire even more geared to the housing market. It has exposure to building materials, mortgages, the sales transaction, home furnishing, home insurance, and consumer purchases that often accompany home sales.
Snapshot of broader housing related exposure of Berkshire
Below is a brief list of the housing related exposure of Berkshire (% ownership listed for major holdings of publicly traded firm; see also John Vincent's tracking of the Berkshire stock portfolio for quarterly updates on holdings):
- Shaw (NYSE:SHAW): World's largest carpet supplier -- a beneficiary of floor covering for new and even updated existing home sales.
- Acme Brick: Makes brick for home exterior, and offers exterior pavers and other masonry for landscaping.
- Johns Manville: Insulation and weatherization.
- Benjamin Moore Paint: Premium paint firm.
- MiTek: Makes a variety of floor and roof trusses, as well as framing, anchoring and other building products and services.
- Marmon: Through 150 companies, Marmon makes a wide range of products for residential housing: electrical wiring, fasteners, bolts, screws, and even water purification and softeners.
- USG (NYSE:USG) (15.89%): Leading maker of drywall (sheetrock) and products for finishing drywall as well as other paneling products.
- Clayton Homes: Builds, sells, finances manufactured/modular homes.
- Burlington Northern Santa Fe: Material ship via BNSF.
- Ingersoll-Rand (NYSE:IR): Mobile air compressors are a staple at construction sites, but the company also owns Trane (home air conditioners & furnaces) and the very popular door hardware firm, Schlage (knobs, locks, etc.).
- Deere & Co (NYSE:DE): An iconic agriculture leader, the company also makes compact skid steers and smaller loaders useful in residential construction; and, of course, premium residential products like lawn tractors, mowers and snowblowers go nicely with new homes; their forestry equipment could be in more demand with increased demand for timber in residential construction.
Real Estate Transaction
- Banks: Wells Fargo (NYSE:WFC) (8.03%) Berkshire owns a good chunk of the nation's largest mortgage lender. Berkshire also has interests in U.S. Bancorp (NYSE:USB) (3.26%), M&T Bank (NYSE:MTB) (4.2%), Bank of NY Mellon (NYSE:BK) (1.6%), and a preferred/warrants Bank of America (NYSE:BAC) interest (covered in depth in many articles on this site and in the media).
- Home Services of America: This gathering of real estate brands and regional companies, such as Prudential Real Estate (NYSE:PRU) and others, can be seen at this site. Many offer brokerage, mortgage, and title services.
- Geico Homeowner's Insurance (also insure cars in the garage)
Other Related Purchases/Activity:
- Furniture: People often fill the new house with new furniture: with Nebraska Furniture Mart, Jordan's Furniture, RC Willey, Cort, and Star Furniture.
- GM (1%) Often an indicator in the housing industry, these full size pickups and vans used by contractors could see increased demand with more building/remodeling.
- Newspapers: Realtors are major buyers of advertising--so an uptick in sales could logically spur increased ads benefiting newspaper (e.g. Gannett (NYSE:GCI)) in the news and media holdings.
- Housewares: Buyers often jettison older housewares in the move. They may fill their new home kitchen cabinets with Pampered Chef products or Ginsu Knives and a new Kirby vacuum could service the new floors (both available from Scott Fetzer). Costco (NASDAQ:COST) (1%) and Wal-Mart (NYSE:WMT) (1.4%) are often first stops to get items for the new home, patio, and garage.
- DirectTV (NASDAQ:DTV) (4.5%): More households and homes could mean more subscribers. Also, in some parts of the US, the utilities can be supplied by MidAmerican Energy.
The synergy around housing positions Berkshire to be a beneficiary of a large chunk of the broadly framed housing related transaction(s).
Berkshire Hathaway's dream home buying scenario
It is not inconceivable to imagine a home buyer spotting a home for sale in a Berkshire owned paper, contacting a Home Services of America real estate agent and taking out a Wells Fargo Mortgage on a new home. The new home might include Shaw Carpet, Ben Moore Paint, MiTek fastners, USG drywall, a Trane heating/cooling system, and Johns Manville insulation, all surrounded by an exterior of Acme Brick (and some components may even have been shipped by BNSF). The closing transaction in some areas could be through one of American Home Services firms.
The family would then drive to the new home, turn the Schlage door knob and may decide to fill the space with new furniture from one of Berkshire's regional furniture stores. A John Deere riding lawn mower may be handy for the new yard. And in some parts of the country, the home could use MidAmerican Energy utilities. And DirectTV may be a desirable entertainment option.
Well positioned for housing transaction and related activity
Even if just a few of these companies' products and services are used in the average home transaction, Berkshire is a well priced option for investors to play a housing upturn in 2013 and beyond. An increase in household formation and an increase in both new and existing home sale transactions will spawn a panoply of economic activity related to building, improving, selling, and equipping homes in North America. And Berkshire has sizable exposure to this broader activity.
And with the strong housing portfolio, you get one of the best records of financial management in stock market history (without any management fee) with Warren Buffett and his team of managers. Investors also get the expert investment of the float from the insurance arms, along with some high quality retail, finance, and consumer operations along with other investments.
Berkshire Hathaway has been well positioned for a potential multi-year recovery in North American housing market -- perhaps the ultimate financial swan song for an icon in investing.
Additional disclosure: I own all of the stocks mentioned in the article individually or through index, mutual funds and ETF's. And the ETF ITB individually as well as housing and banking sector funds.