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RUST BELT REVIVAL: FROM DOOM TO BOOM

September 08, 2008
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Andrew Mickey

8 followers
The locals call it “The Pointes.”

Gross Point was one of the highest rent neighborhoods in the country. It sits between Detroit and Lake St. Clair. Its wooded scenery, mild summer weather, and proximity to industrial areas have made it a popular residential neighborhood for industrial titans for a century.

The Pointes was one of the hottest real estate markets in the 1920’s. You had to have a mansion in Gross Pointe If you were an executive in Detroit’s booming auto industry.

Flash forward 90 years and we’ve got a completely different picture. There are “for sale” signs hanging off a lot of houses. As Big Auto downsizes, slashes salaries, and hangs on for survival, the rich have left town. In the process, they’re creating a great opportunity to get in at the bottom.

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Thanks in part to the big problems at General Motors (GM:NYSE) and Ford, getting rough in Gross Pointe. But it’s probably worse in Detroit. More than one million residents have fled Detroit since 1950. When the jobs left, the people did too.

First it was factory automation eliminating jobs. Now it’s a sharp decline in demand for the Big Auto’s SUV’s and an inability to compete against cheaper (and sometimes more efficient) foreign labor. The population of Detroit is now less than 900,000.

Recently, Home Properties Inc. (NYSE:HME), a residential real estate investment trust (REIT), unloaded 5,000 Detroit apartments on Lightstone Group. Home Properties said the sale was “ consistent with our strategy of focusing our operations in…higher-growth markets.”

They’ve left Detroit for dead like a lot of others. The mass exodus has caused real estate prices to fall. Vacancies have climbed. With the aggressive selling, there are a lot of huge sales. Mansions that originally sold for $2 million just a few years ago are going for $1 million.

It’s not just in Detroit though. The entire U.S. Midwest, also known as the “Rust Belt,” is facing the same challenges. Towns that sprouted up around manufacturing centers have been abandoned in the same way as Detroit. Slowly but surely, that’s all starting to change.

A revival in the Rust Belt is appears to be starting slowly but surely and investors could be in for a pretty solid payoff.

You see, when industry rolled out of town, Rust Belt factories we shut down, boarded up and left for dead. That is…until the next U.S. industrial revolution really ramps up and brings the Midwest back into prosperity.

It may surprise you, but one of the fastest growing and manufacturing industries are staying right in the United States. They’re not headed to the dank low-cost, labor-intensive factories of Vietnam, Mexico, or China, they’re staying right here.

In fact, the migration has already started. Big Auto’s moving out of its factories across the Ohio River Valley and Big Solar is moving in. The way things are going; the United States is set to become the manufacturing hub of the $18 billion solar industry.

Fortune says, “Nearly all the United States’ current solar manufacturing capacity is in the Midwest.”

And they’re absolutely right. With the exception of Nanosolar’s thin film facility under construction in California and Ausra’s facility in Las Vegas, all solar panels made in the U.S. are built in the rust belt.

First Solar (NASDAQ:FSLR) has been one of the first to start tapping into the rust belt. The $22 billion solar panel manufacturer recently announced the expansion plans for its Ohio factory.

Germany’s Flaberg is slated to build a new solar panel-making facility in Pittsburgh, Pennsylvania.

The original U.S. of solar panel developer, Energy Conversion Devices (NASDAQ:ENER), operates three manufacturing facilities in Michigan. On top of that, Energy Conversion Devices has also laid out a plan to almost double production double capacity in one of them.

These solar powerhouses have spotted the value in the rust belt and are taking full advantage. Energy Conversion Devices CEO says, “Our processes really require high productivity, so what makes it competitive here in the Midwest is that we have a great labor force that is eager to work and well-trained already.”

Frankly, there aren’t too many other places in the world offering a willing, ready, and able manufacturing labor force. Considering Big Auto’s financial troubles and scheduled shutdowns, there will be plenty more space and trained labor coming available to the solar industry. And if any industry needs more capacity, Big Solar does.

There were 2,800 Megawatts (MW) of solar energy capacity installed last year. There were only 1,700 MW of new solar power brought on line the year before. That’s way up from a mere 21 MW in 1985.

The solar industry is growing…fast. They need more capacity. The rust belt will help fill that void.

The rust belt will return to prominence with the help of the solar industry. Let’s face the facts. Oil isn’t going back to $20 a barrel anytime soon. Midwestern labor is getting cheaper in order to stay competitive. The U.S. dollar is not going to be regaining its strength for a long time (if ever) making U.S. goods cheaper in the global marketplace.

Over the long run, the rust belt’s problems will get sorted out. The U.S. may not have been an early mover in developing a solar power industry, but they’re cutting the big checks to get caught up. There are billions of investment dollars flowing into the solar industry and the rust belt will be getting a big chunk of that investment.

The rust belt is not doomed to economic oblivion. It just has to change with the times like all of us have to do.

The rust belt will be coming back to life soon. Investors willing to buy shares in companies that are taking advantage of the situation or willing to buy up real estate assets at dirt cheap prices will be well rewarded within the next five to ten years.

Companies like the Lightstone Group, which bought all of those Detroit apartments, see the potential here. They have an advantage though. As a private firm, Lightstone has the luxury of a genuine long-term outlook. A publicly traded company like Home Properties does not. It has to report to a short-sighted Wall Street every three months.

Investing in the rust belt is a long-term proposition, but all the fundamentals are there. At the moment, I haven’t found any easy, highly liquid pure plays on this opportunity yet. But the situation does remind us of how to be good investors.

There aren’t too many people willing to put much money into the region now, prices are depressed, and this is the time to buy low. And it’s that type of “buy low” opportunity, which creates the low-risk/big-upside upside odds, that gets the Prosperity Dispatch team very interested. As everything plays out, there will probably be an opportunity to sell high. In the end, that’s what investing is all about.

Good investing,

__________________________

Andrew Mickey

Chief Investment Strategist, Q1 Publishing

About the author:

Andrew Mickey
GuruFocus - Stock Picks and Market Insight of Gurus

Rating: 2.8/5 (8 votes)

Comments

traderashish
Traderashish - 6 years ago
Whitman says - Buy Cheap and safe.

Not just cheap.

There are lots of places and companies which are cheap but are they safe?

Please leave your comment:


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