Warren Buffett appeared this morning on CNBC's "Squawk Box" to discuss his 2011 annual letter, released over the weekend. The chairman and CEO of Berkshire Hathaway (BRK.A, BRK.B) said in the interview that equities are still attractive as an overall asset class and will likely outperform all other asset classes except for one: housing.
Buffett said he would buy large numbers of single-family homes if it were practical to do so. While it may be impractical for Buffett, or any individual, to buy thousands and thousands of houses, the underlying theme is that houses are cheaper than they have ever been, and the cost of home ownership -- reflected by interest rates -- is at a historic low. Also consider news this morning that pending home sales gained 2% to 97, surging to a nearly two-year high.
So while Buffett may not be buying hundreds of thousands of houses himself, first time homebuyers and investors are starting to buy them. Revenue and profit growth at Lowe's (LOW) and Home Depot (HD) are a sign that a recovery, not a contraction, in housing is likely under way. This morning Lowe's beat analyst estimates and reported that sales grew by 11% in the fourth quarter, with same-store sales up 3.4%. Net income jumped more than 20% quarter over quarter. Both of these giants currently pay attractive dividends and have picked up market share during the housing downturn as smaller outfits shuttered.
One unknowingly excellent beneficiary of a recovery in housing is Mueller Industries (MLI), which makes copper and aluminum products used in plumbing and refrigeration. Mueller can pass along higher commodity prices to its customers, who then pass them along to their consumers. Both the renovation of old houses and the development of new houses bode well for Mueller. The company's largest shareholder is Leucadia National (LUK), a conglomerate with a very conservative outlook for the markets; its current investment portfolio consists of four securities, and MLI is its second-largest position.
It's slow, but 2012 appears to the beginning of a move in the right direction for the housing market. Investors see the capitalization rates to be had from financing houses at 4%, and first-time buyers won't find better terms to buy than right now. Together, these two forces will continue to push housing in the right direction.
Buffett on Financials
When asked about his favorite banking stock, Buffett was quick to respond: Wells Fargo (WFC). He continues to buy shares in Wells Fargo and, given current prices and Berkshire's hefty cash position, he will likely continue to do so.
Consider WFC's return on assets of 1.3%. If Bank of America (BAC) just gets back to half that level, an ROA of 0.65%, its net income would be $14.5 billion. At today's market valuation, BofA is valued at approximately 5x those implied earnings. Furthermore, there is no fundamental reason that in the future BofA can't earn an ROA of 1%, in which net income would exceed $20 billion. This is why Gad Capital Management, home of the Sham Gad Partners Fund, owns BofA common stock and will keep it for quite some time.
In his letter, Buffett praised CEO Brian Moynihan for the job he's done at BofA. Moynihan clearly inherited a plethora of problems and he is making all the right moves, but Buffett acknowledged that it would take time to fix them all. Regarding Berkshire's 700 million BofA warrants, Buffett is confident that they will deliver tremendous value over the next few years.