These high-quality companies are trading at a discount
Summary
- While the gurus do not own these stocks currently, they have some of the characteristics Buffett and Munger value.
Three homebuilders made headlines in August after Warren Buffett (Trades, Portfolio)’s Berkshire Hathaway
BRK.B
(BRK.A, Financial)(BRK.B, Financial) revealed it entered positions in D.R. Horton Inc. (DHI, Financial), NVR
NVR
Inc. (NVR, Financial) and Lennar
LEN
Corp. (LEN.B, Financial).
While the conglomerate’s third-quarter equity portfolio has yet to be released, the legendary investor is known for his preference of investing in wonderful companies at fair prices that have strong competitive advantages and predictable businesses for the long term. This strategy has contributed to his strong performance of an average annual return of 20% since 1965.
As these companies operate in a somewhat volatile industry, the purchases may have come as a surprise to some. However, homebuilders this year have had to simultaneously contend with high interest rates on mortgages as well as rampant demand due to shortages of existing homes, which Berkshire said in a filing it sees as a benefit for this space going forward. To further prove this point, the industry has posted a gain of 26.76% year to date even as the rest of the sector lags.
Based on these developments, investors may be curious to see if any other homebuilders potentially meet the criteria embraced by the Oracle of Omaha and his right-hand man, Charlie Munger (Trades, Portfolio).
One way to do this is through the Buffett-Munger Screener, a Premium GuruFocus feature that prioritizes good companies with high predictability, strong competitive advantages, that incur little debt while growing and are fairly valued or undervalued. As of Oct. 30, homebuilders that qualified for the screener were Toll Brothers
TOL
Inc. (TOL, Financial), Cavco Industries Inc. (CVCO, Financial) and Installed Building Products Inc. (IBP, Financial).
Toll Brothers
With a 10-year Ebitda growth rate per share of 27.50%, a five-year growth rate of 24.60% and a one-year growth rate of 61.30%, Toll Brothers (TOL, Financial) tops the list.
The Fort Washington, Pennsylvania-based luxury homebuilder has a $7.44 billion market cap; its shares were trading around $69.21 on Monday with a price-earnings ratio of 4.98, a price-book ratio of 1.12 and a price-sales ratio of 0.73.
The GF Value Line
VALU
suggests the stock is fairly valued currently based on its historical ratios, past financial performance and analysts’ future earnings projections.
At 95 out of 100, the GF Score indicates the company has high outperformance potential on the back of solid ratings for profitability, growth and financial strength and more moderate value and momentum ranks.
The company also has a predictability rank of 4.5 out of five stars. According to GuruFocus research, companies with this rank return an average of 10.6% annually over a 10-year period.
Of the gurus invested in Toll Brothers, Ron Baron (Trades, Portfolio) has the largest stake with 1.62% of its outstanding shares. Ken Fisher (Trades, Portfolio), First Eagle Investment (Trades, Portfolio), Chuck Royce (Trades, Portfolio) and several other gurus also have positions in the stock.
Cavco Industries
Next is Cavco Industries (CVCO, Financial) with a 10-year Ebitda growth rate per share of 22.30%, a five-year growth rate of 30.60 and a one-year rate of 17.40%.
Headquartered in Phoenix, the manufacturer of factory-built homes, including modular housing and RVs, has a market cap of $2.22 billion; its shares traded around $256.21 on Monday with a price-earnings ratio of 10.01, a price-book ratio of 2.17 and a price-sales ratio of 1.12.
According to the GF Value Line, the stock is significantly undervalued currently.
The GF Score of 98 implies the company has high outperformance potential, driven by solid ratings for all five criteria.
Cavco has a four-star predictability rank. GuruFocus data shows companies with this rank return an average of 9.8% annually.
With 2.18% of its outstanding shares, Mario Gabelli (Trades, Portfolio) is Cavco’s largest guru shareholder. The stock is also being held by Fisher, Royce, Jim Simons (Trades, Portfolio)’ Renaissance Technologies, First Eagle Investment (Trades, Portfolio) and Ray Dalio (Trades, Portfolio)’s Bridgewater Associates.
Installed Building Products
Rounding out the contenders is Installed Building Products (IBP, Financial), which has a 10-year Ebitda growth rate per share of 43.50%, a five-year growth rate of 30.20% and a one-year rate of 38.50%.
The Columbus, Ohio-based company, which installs insulation for residential and commercial builders, has a $3.12 billion market cap; its shares were trading around $109.79 on Monday with a price-earnings ratio of 12.96, a price-book ratio of 5.56 and a price-sales ratio of 1.12.
Based on the GF Value Line, the stock appears to be modestly undervalued currently.
Supported by robust ratings for four of the metrics and a more moderated financial strength rank, the GF Score of 98 means the company has high outperformance potential.
Installed Building Products also has a four-star predictability rank.
Baron is Installed Building Products’ largest guru investor with a 3.56% stake. Royce, First Eagle Investment (Trades, Portfolio), Fisher, Steven Cohen (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio) also own the stock.
Final thoughts
While neither Buffett nor Munger own any of these stocks currently, they may be good opportunities due to their high-quality businesses, strong moats and solid growth.
Disclosures
I/we have no positions in any stocks mentioned, and have no plans to buy any new positions in the stocks mentioned within the next 72 hours.
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