1 Warren Buffett Stock That Could Go Parabolic in 2025 and Beyond

Key Points

• Berkshire Hathaway made several purchases in the homebuidling sector in the first quarter.

• It bought shares of Lennar, D.R. Horton, and Pool.

• Lennar could double if the housing market cooperates.

• 10 stocks we like better than Lennar ›

Berkshire Hathaway (NYSE: BRK.A) (NYSE: BRK.B) CEO Warren Buffett is rightfully known as the greatest investor of all time.

In more than 60 years at the helm of his conglomerate, Buffett has approximately doubled the annual return of the S&P 500, leading to market-crushing returns for Berkshire Hathaway. Because of that history, investors pay close attention to Berkshire's stock holdings and purchases to glean insights into the market and top stocks to buy.

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Berkshire's second-quarter purchases included some telling hints. One of the company's biggest purchases was Lennar (NYSE: LEN), and it also added another homebuilder, D.R. Horton, and Pool Corp, a distributor of swimming pool supplies, showing the company making a significant bet on the housing market.

Image source: Getty Images.

Why it looks like a smart move

When interest rates started rising in 2022, the housing market slowed significantly, and existing home sales have been tracking around 4 million a year, down about 30% from pre-pandemic levels.

There's a national shortage of homes. Estimates vary, but they all indicate that the country needs to build several million new homes. According to the U.S. Chamber of Commerce, there's a "severe shortage" of 4.7 million homes across the country.

Existing home sales can aid the housing market in some ways, but only new construction can solve the housing shortage, which may be a more pressing challenge for the national economy. Homebuilding, of course, is the sector that can help solve that problem. Many of these companies, like Lennar and D.R. Horton, have scaled back on construction since the housing collapse during the great financial crisis, but there could be a golden opportunity for them now.

Not only is there a massive housing shortage in the country, but mortgage rates are starting to come down, hitting a three-year low last week, though they are still hovering around 6%.

Still, the Federal Reserve expects to cut rates by another 50 basis points over the rest of the year, which could put more downward pressure on mortgage rates.

Falling mortgage rates will make monthly payments cheaper for prospective homebuyers, and it's likely to diminish the lock-in effect that has kept homebuyers from selling their homes.

Why Lennar could be a winner

While the entire homebuilding sector is well positioned to benefit from falling mortgage rates, Lennar could soar from here. The company is fresh off a strong quarter with new orders up 12% to 23,004 homes, revenue of $8.8 billion, and operating earnings of $760 million.

Lennar tends to cater to a more affordable segment of the housing market, which has been hit hard by soaring prices and high monthly payments.

In its third-quarter earnings report, management expressed optimism that the Fed rate cut would drive more demand in the housing market. It's taking the approach to moderate its construction for now and wait for demand to recover.

The stock also looks cheap at a price-to-earnings ratio of 12, and management is taking advantage of the discount, repurchasing its stock. In the third quarter, it bought back 4.1 million shares for $507 million.

The company has had to lean on incentives due to the weak demand in the housing sector, but that could change as rates fall.

Lennar also looks poised to capitalize on an improvement in the housing market as it's shifted its business model to an asset-light, or just-in-time model after spinning off Millrose Properties, making it more flexible and able to absorb any shifts in the housing market.

Homebuilding can be a high-margin business in a healthy housing market, and Lennar stock could double with the right combination of revenue acceleration, margin growth, and multiple expansion. If home demand recovers and monthly payments get cheaper, the stock could soar.

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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway, D.R. Horton, and Lennar. The Motley Fool has a disclosure policy.