Is Warren Buffett Nuts?

11/20/2007 12:00 am EST

Focus:

Michael Brush

Columnist, MSN Money

Michael Brush, contributor to MSN Money, wonders why the Oracle of Omaha is investing in, of all things, manufactured homes-and he names some potential winners.

Few would call Warren Buffett unwise with his money.

So what's he doing raising money in the housing sector? Specifically, why is he helping put three-quarters of a billion dollars into manufactured homes, those humble, modestly priced abodes that come shipped in prefabricated components, ready for assembly?

Sales of manufactured homes have been sluggish for years because the industry missed out on the lift from subprime loans. Now, with the entire housing market in the dumps, sales of factory-built homes are the lowest they've been in 45 years.

So what's a smart investor like Warren Buffett doing here?

A month ago, Berkshire Hathaway used its AAA credit rating to raise $750 million through a debt offering for Clayton Homes, a provider of factory-built homes that's in the Oracle of Omaha's portfolio of holdings.

This means it may be time for long-term investors to begin putting money into prefab-home stocks, says Robert Robotti of Robotti & Co. investment advisers, which already holds several of the stocks.

"To me this is classic contrarian investing in the sense that you become aggressive when everyone else is pulling back," says another value investor, Robert Rodriguez, of First Pacific Advisors. 

Rodriguez and other observers think Clayton will use the money to back mortgage lending in the sector. "By raising this capital they become the dominant financer of this industry," says Rodriguez. 

At least two other big factory-built-home suppliers, Fleetwood Enterprises (NYSE: FLE) and Champion Enterprises (NYSE: CHB), say they are seeing more sales through Clayton's retail divisions, thanks to Buffett's presence.

The factory-built group went through its version of the subprime lending debacle about seven years ago. Since then, easy-credit home mortgages have been off limits, so the group isn't getting directly hit by a subprime crisis now.

Manufactured homes typically sell for $100,000 or less-less than half the cost of a site-built home. And the quality has risen. Some factory-built-home suppliers are already getting a lift from the return of traditional buyers.

So when will the sector turn around?Champion's chief financial officer Phyllis Knight expects a "modest recovery" next year, when sales of manufactured homes may see increases in the low single digits.

Champion[recently] surprised investors with a 43% spike in reported income. The company has done a good job of shrinking capacity and maintaining financial strength, says Rodriguez.

Fleetwood, in contrast, was late to restructure, but it is now making progress under new management. Valued separately, its recreational-vehicle and manufactured-housing divisions could be worth $13 a share, estimates Citigroup analyst Gregory Badishkanian. But it's not clear the company will be split up. (Champion closed below $9 Monday while Fleetwood closed at around $7-Editor.)

If you buy stocks in this group, keep in mind they aren't a quick trade. You'll be investing alongside patient value investors like Buffett, Robotti, and Rodriguez, who don't mind waiting years for the big payoff in a position. (Rodriguez owns Champion and Fleetwood.)

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