A generational change is like a pig swallowed by a python.
Before you get distracted by disgust or fear of this mental image, let me explain my reasoning here. The pig in this case is a generation, which is a cohort of people linked by the period of birth as well as the associated attitudes and behaviors. Python is time – it takes a python a long time to digest a pig, and that’s quite a difficult feat.
As the python slowly digests the pig (i.e. a generation ages) profound changes occur in the environment. The aging of the generation and the changing environment around are things that have been set in slow but inevitable motion by nature itself.
The graph below shows how the Pew Research center defines the different generations:
This article focuses on what is happening with the millennial generation as they move into the family forming phase of their life. Currently, millennials are the largest generation in North America and Western Europe. The world’s second largest generation, the baby boomers, is retiring.
The change of the millennium
Millions of millennials are now entering the phase of their lives where they move out of rented apartments or condos and seek out single family homes in suburbs and satellite communities. The pandemic has energized this change as it is now more common and acceptable for people employed in certain office jobs to work fully or partially from home. This makes daily commute less expensive and has made the suburbs and ex-suburbs much more attractive. People are looking for larger homes with home office setups.
At the same time, the pandemic has interrupted or slowed the passage of their parents, ie “baby boomers”, from their large suburban houses to houses and condos of reduced size. This created a double whammy of sharply reduced supply of single family homes and increased demand. This can be seen in the graph below detailing “The Inflation-Adjusted S & P / Case-Shiller National US Home Price Index, Adjusted to Today’s Dollar.” Since the start of the pandemic, the index has moved into high gear.
I scanned GuruFocus’ undervalued Buffett-Munger (UBM) screen to examine stocks that could benefit from this demographic shift. The UBM screen looks for highly predictable companies with low price-earnings ratios and excellent recent growth. I think the next three actions on the list are halfway to a secular housing-related bulls thesis that could last another decade. They also seem undervalued, with solid balance sheets.
Market capitalization (M $)
10-year EBITDA growth rate (per share)
5-year EBITDA growth rate (per share)
One-year EBITDA growth rate (per share)
PE ratio without NRI
DR Horton Inc
Sleep Corp Number
Home builders are an obvious choice for this demographic shift. Among the major American home builders, DR Horton Inc. (DHI, Financial) is distinguished by its size and valuation. The $ 36 billion market-capitalization company is the largest homebuilder in the United States. It sells for a price-earnings ratio of 9 and has a PEG ratio of 0.32. Net debt is minimal. Revenue has grown over 20% over the past three years and profits have grown twice as fast. The GF Value row indicates that the company is “fairly valued”.
Another thing to note is the dotted part of the GF value line, which estimates the future growth of the GF value and is strongly positive. I agree with the estimate that DR Horton still has many years of growth in this cycle.
When you buy a house, you are most likely buying new furniture, beds, etc. This is where furniture retailers like La-Z Boy Inc. (LZB, financial) enter.
La-Z-Boy has seen a few volatile years and is back from its historic post-pandemic highs and well below its long-term trend, which is on a steep upward slope.
La-Z-Boy manufactures, distributes and sells home furnishings products. It is a producer of recliners and distributor of residential furniture. The company operates primarily in the United States, but also has secondary activities in Canada and other countries. The reportable segments of the company include the wholesale segment, which manufactures and imports upholstered furniture; and retail, which sells upholstered furniture and storage furniture to the end consumer. The majority of the company’s revenue comes from its wholesale segment. Some of the company’s main brands include England, Kincaid, American Drew and Hammary.
The GF line indicates that this title is slightly undervalued. The discounted cash flow calculator also indicates a considerable undervaluation.
The business has no long-term debt and most of the liability is related to working capital or capital leases of its retail stores.
Sleep Number Corp. (SNBR, Financial) is a manufacturer and seller of adjustable beds, mattresses and related supplies such as pillows. This was a high flight during the pandemic, but it has now fallen below its mid-term trendline.
It is reported as slightly undervalued by the GF Value line. A discounted cash flow assessment indicates a substantial upside potential of 50% or more. The story is similar to that of La-Z boy – when people move into single-family homes, they usually buy new beds for their new digs.
The balance sheet is in excellent shape with no long term debt. The company has negative equity on its balance sheet because it has a habit of buying back stocks. Last year, it repurchased 18.4% of the outstanding shares.
Siding with long-term demographic changes can be extremely profitable in the long run. Bill Smead, founder of Smead Capital Management, enjoys housing-related stocks and commented on this ongoing secular change. Those stocks that meet Buffett-Munger’s undervalued criteria of “good stocks at good value” could be, in my opinion, attractive investments to take advantage of the generational change.