“The large home builders already are a delicious cake—and lower rates are merely icing on the cake,” Wachenheim wrote in an email to Barron’s.
By Ed Lin Oct 06, 2024, 3:00 am EDT
Value investor Edgar Wachenheim has recently seen big gains in home-builder stocks, and he sees more upside on the way.
“The large home builders already are a delicious cake—and lower rates are merely icing on the cake,” Wachenheim wrote in an email to Barron’s.
Wachenheim is chairman of Greenhaven Associates, whose investments in home builders totaled $4.3 billion at the end of September —about half of the $8.5 billion value of its U.S.-traded portfolio. Those home-builder investments rose 29% in value from the end of June while the share count remained materially unchanged.
Greenhaven’s largest home-builder positions as of Sept. 30 included 9.1 million class A Lennar shares, 5.5 million Toll Brothers shares, 5.6 million PulteGroup shares, and 3.7 million D.R. Horton shares, valued at that time at $1.7 billion, $856 million, $803 million, and $700 million, respectively. Shares of Lennar, Toll Brothers, PulteGroup, and D.R. Horton have surged 22%, 46%, 35%, and 21% so far this year—with the great bulk of those gains coming from a market rotation out of tech stocks and the vaunted Magnificent Seven in early July. Interestingly, only three Magnificent Seven stocks now sport year-to-date gains that top 21%: Nvidia, Meta Platforms, and Amazon.com.
But will the home builders see 2024 gains slip away as the Magnificent Seven have? On the contrary, Wachenheim says this may be just the beginning of more gains in a falling-rate environment.
“I believe lower rates are a plus for the home builders because lower rates will result in increased affordability, and thus higher demand,” he wrote.
Wachenheim says that even without falling rates, “the largest home builders should prosper and grow.” He cites a large U.S. housing shortage—“people have to live somewhere,” Wachenheim notes.
The largest home builders should continue to gain market share as the industry consolidates. Sealing the deal, they are also asset-light, “and now have strong balance sheets, and large cash flows that can be used for share repurchases and small acquisitions.”
Comments