Where are the value stocks in a market obsessed with AI? The answer might be more obvious than it seems.
Everything to do with data centres is thriving. But an insight from Warren Buffett’s right-hand man shows investors where to look.
How to find opportunities
Charlie Munger worked as Berkshire Hathaway’s vice-chair for 45 years. And in a 1986 speech, he outlined one of his greatest insights:
The method… was to ‘Invert, always invert.’ It’s the exact thing you should never do when seeking a life of misery. But for those of you not sold on a life of misery, what we did was flip the question – how to be happy – on its head.
It’s good advice for life. And it’s also a great strategy for value investors looking for opportunities worth considering.
Right now, every stock connected to AI is surging. The huge demand is affecting the entire data centre supply chain.
So what’s the inverse of this? Which industry is seeing demand weakness and falling valuations across its supply chain?
Where’s the value?
The answer is housing. On both sides of the Atlantic, builders are dealing with an extremely tough market.
In the US, consumer sentiment just hit a 10-year low. That makes people wary about big purchases – like houses.
Source: Trading Economics
Interest rates are also much higher than they were five years ago. This means people moving house get a lot less for their money.
That’s a tough environment for selling houses. But it’s affecting US building suppliers as well as housebuilders.
As a result, Berkshire has moved to acquire Taylor Morrison Home Corporation. And the UK situation is similar.
The UK housing market
UK housebuilders have been struggling in a tough market. And they’ve been discounting their inventory to try and shift it.
I like the look of Vistry. Its balance sheet is risky, but it could benefit from a huge affordable housing programme.
Forterra (LSE:FORT) is another interesting name. A weak market also weighs on demand for bricks.
The UK’s high energy costs are also a risk. But the firm has some key advantages for dealing with these.
Forterra’s Desford factory is one of the most energy-efficient in Europe. And the stock has a lot in common with Berkshire’s Taylor Morrison investment.
A winning combination?
Even at a 25% premium to the previous share price, Berkshire is paying a price-to-book (P/B) multiple of 1.1. That’s not high.
It’s especially low given the firm’s growth. Over the last 10 years, the company’s book value per share has grown at an average of 20% a year.
Source: Fiscal.ai
Forterra is similar. It’s also a growing business that’s trading at a modest premium to its book value.
Source: Fiscal.ai
That looks like a winning combination to me. And a structural shortage of housing in the UK means there’s a good chance it continues.
Exactly when things pick up is hard to say. But I think the idea of buying the stock and waiting is well worth considering.
Value investing
Berkshire has a big advantage over other investors. Its other building subsidiaries provide a chance to add value to its new acquisition.
Despite this, housebuilding stocks are clearly out of favour with the stock market. So I think this is an industry well worth looking at.
Should you invest £5,000 in Forterra Plc right now?
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Stephen Wright owns shares in Berkshire Hathaway and Vistry.
