Warren Buffett is being priced out of stocks and deals, spending billions on buybacks, and would love to own more homebuilders. 3 experts explain why.

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warren buffett
Warren Buffett.

  • Warren Buffett is being priced out of buying stocks and businesses, experts say.
  • The billionaire investor spent nearly $40 billion on Berkshire Hathaway stock in 18 months instead.
  • Buffett has cashed in on the housing boom, but may want even more exposure.
  • See more stories on Insider’s business page.

Warren Buffett is balking at the prices of stocks and acquisitions, relying on share buybacks to deploy capital, and may be hungry for a bigger slice of the homebuilding market, experts say.

Priced out

The famed investor and Berkshire Hathaway CEO built his fortune by purchasing stocks and businesses at knockdown prices, but he’s struggled to find bargains in recent years.

“Buffett doesn’t like buying into euphoric markets,” Bill Smead, the chief investment officer of Smead Capital Management, told Insider. “Large, quality stocks are overpriced in his mind.”

The Berkshire chief, who commands a roughly $300 billion stock portfolio, only spent $1 billion on stocks and sold $2.1 billion worth last quarter. The lack of activity suggests he didn’t find any opportunities to make significant additions to his portfolio, or dispose of anything material, Darren Pollock, a portfolio manager at Cheviot Value Management, told Insider.

Berkshire, armed with $144 billion of cash at the last count, will be ready to pounce when the downturn comes, Smead said. “Buffett’s bazooka will be loaded when stocks go from in fashion, to out of fashion.”

Another issue is that private-equity firms and special-purpose acquisition companies (SPACs) are scrambling to close deals, and don’t care if they overpay. Buffett won’t be able to compete until interest rates rise substantially, Smead said, as that would spur investors to park their cash elsewhere and eliminate some rival suitors.

Buying Berkshire

Buffett, faced with a ballooning cash pile and very little worth buying, has embraced stock buybacks as an outlet for Berkshire’s capital. The investor has repurchased close to $40 billion of his own company’s stock since the start of 2020.

Berkshire has been paying below 1.4 times book value for its shares, “which fits his definition of paying a good price for a great business,” Pollock said.

However, Berkshire’s stock price has jumped about 26% this year, making buybacks less attractive. Accelerated repurchases haven’t stopped Berkshire’s cash pile from mushrooming to record levels either.

James Shanahan, an Edward Jones analyst who covers Berkshire, wants to see Buffett deploy more cash, as it’s earning virtually nothing when interest rates and Treasury yields are this low.

“We would like to see more investment activity, as the cash is a drag on earnings and profitability,” Shanahan said in his latest research note.

Doubling down on housing

Berkshire’s subsidiaries have been major beneficiaries of the US housing boom. The likes of Clayton Homes, Nebraska Furniture Mart, Acme Brick, and Berkshire Hathaway Home Services have capitalized on buoyant demand for construction, home furnishings, building materials, and housing transactions.

Still, the conglomerate may be looking to increase its exposure to housing, and cash in on a generational surge in demand for homes.

“Buffett can see that millennials will overwhelm the economy and has numerous ways to make money from Main Street economic activity,” Smead said. “He’d love to be more involved in home building, but hasn’t had the door open yet.”

https://markets.businessinsider.com/news/stocks/warren-buffett-berkshire-hathaway-stocks-deals-buybacks-housing-boom-experts-2021-8

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