Berkshire has LEN, but I’m still backing TOL

95It’s been over a week since I made a 10-year wager with my friend and fellow financial publisher, Porter Stansberry – something that could come back to haunt me.

He thinks I’m crazy for recommending homebuilder Toll Brothers (TOL). And while I understand why he prefers NVR (NVR), I can’t agree it’s the better investment right now.

So we’re putting our opinions to the test, tracking their total shareholder returns (including dividends) from October 6, 2026, to October 6, 2036. Time will tell who got it right, and may the best homebuilder win.

As I’m well aware though, there’s another homebuilder bet going on right now in a much more high-profile, big-money wager. As you probably know, Greg Able’s Berkshire Hathaway (BRK-A)(BRK-B) has repeatedly bought into Lennar (LEN) this year alone.

So I get if people are questioning me twice over in my own choice. Why am I betting on Toll Brothers when one of the world’s most respected investors is engaged elsewhere?

Berkshire is without a doubt an amazing company. I admire its commitment to researching management quality, capital allocation, and competitive advantages. And the same goes for its long-term orientation that focuses on businesses’ likely potential instead of short-term opinions.

That’s why people pay attention to what it buys, including its late September SEC filing concerning about 26 million Lennar class A shares and 553,000 class B shares.

I’m absolutely certain that’s due in large part to the homebuilder’s proven understanding of its industry. Inventory, controlling costs, the whens and wheres of development decisions: It’s demonstrated serious skill across the board.

Still, I’m not sure if it’s a bet “little guy” investors should be making. There are more suitable homebuilder opportunities out there for the Average Joe.

And, yes, by that I mean Toll Brothers.

Lennar has pursued a relatively aggressive strategy of maintaining production and delivery volume despite the housing market slowdown. Instead of really reducing the number of homes it builds, it’s adjusted prices and added sales incentives.

In fact, incentives averaged 12% of its selling price in fiscal Q3.

That’s no doubt helping Lennar support subcontractor relationships, purchasing efficiencies, and market share. But it also costs more, as evidenced by its latest quarterly results, where:

None of those are positive points, but the last one concerns me the most. It represents a 170 basis-point (bps) margin compression, which is far too large for my liking.

And this is all while selling, general, and administrative expenses rose to 9.2% as a percentage of home sales. So Lennar’s homebuilding operating margin was 6.6%, and it expects gross margins of 15.5%–16% for the final quarter.

Now, for the record, I’m not accusing it of being poorly managed. I’ve already said it’s very good at what it does, and I stand by that statement.

I’m just wondering whether shareholders are being properly compensated in the process.

I’m also wondering about Lennar’s shift away from outright land ownership. The company is increasingly holding properties through options and land-banking contracts.

So much so that, at the end of Q3, Lennar owned less than 2.5% of the 488,000 homesites it controlled.

On the one hand, that’s an extraordinary transformation that does save it money. But it doesn’t eliminate financing costs. Land bankers still want to make a profit, and the fees they charge still affect Lennar’s results.

Take Millrose Properties (MRP), which it spun off last year. That resource reported how its Lennar-specific invested capital had an 8.5% weighted average yield as of June 30.

This doesn’t automatically translate into 8.5% incremental gross-margin costs, mind you. But by my estimate, it could still contribute more than 100 basis points (bps) of gross-margin pressure relative to some other land-control structures Lennar could choose.

A land-light model can simultaneously improve inventory and return on invested capital – yet increase embedded costs per home delivered. And while that might pay off big years down the road for a company as well-funded as Berkshire…

I’m not convinced these details make Lennar worth buying now for individuals with less liquidity on their side.

As I explained last week, Toll Brothers doesn’t have to worry about incentivizing its operations nearly so much. Because it builds luxury homes, its buyers tend to be less cash-strapped or dependent on mortgage levels.

Recessions can still hurt it, sure. But it’s much more insulated against them nonetheless.

Not that Toll Brothers takes that for granted. It actually has a long history of disciplined land investment along with operational improvements and capital allocation.

Better still, it bought back around half of its outstanding shares over the past decade between 2016 and 2024. And that can do wonders for shareholders.

Consider a company with 200 million shares outstanding that earns $1 billion. Its earnings per share would then be $5. If it reduces that count to 100 million under the same conditions, that boosts its EPS to $10.

In short, Toll Brothers knows how to improve shareholder returns, including with its own land-banking efforts. Which, for the record, are more balanced and cover far fewer homes compared to Lennar’s.

That’s not the only distinction to note though if we’re comparing valuations between the two companies. Just look at Toll Brothers’ higher dividend, which comes complete with a lower payout ratio to support it.

Just as importantly, it offers much greater upside according to Wide Moat Research estimates. As shown above, our $187 target implies about 40.5% appreciation for Toll Brothers but just 18.7% for Lennar.

Lennar undoubtedly has the capacity to sell more homes considering its size and willingness to drop its prices. But that capability doesn’t automatically determine shareholder return, and that’s what I ultimately care about.

I imagine I’m not alone at all in that regard.

Again, I respect Berkshire Hathaway's investment philosophy and ultimate decision to invest in Lennar. As somewhat detailed here, the company is impressive on multiple levels.

This includes something I didn’t mention: its substantial interest in Five Point Holdings (FPH). Though a small real estate company, Five Point operates in major California master-planned communities that give it significant profit power.

I would even say the business deserves an article of its own. That’s how interesting it is, both in positive and complicated ways.

Even so, I just don’t see how Lennar’s current details make it right for smaller-scale investors like you and me. And that becomes even more true when opportunities like Toll Brothers exist.

Berkshire Hathaway can bet on Lennar’s ability to navigate the housing cycle. And Porter Stansberry can go with NVR.

I wish both of them well in their selections. (Though not too well in Stansberry’s case considering how I aim to beat him.)

But Toll Brothers remains the company for me. And I think in 10 years, my returns will prove it superior out of the three.

Happy SWAN investing,

Brad Thomas,
Editor, Wide Moat Daily