A generational shift is like a pig being swallowed by a python.
Before you get distracted by either disgust or awe at that mental image, let me explain my reasoning here. The pig in this case is a generation, which is a cohort of people bound by birth period as well as related attitudes and behaviours. The python is time - it takes the python a long time to digest a pig, and it's quite the difficult feat.
As the python slowly digests the pig (i.e. as a generation gets older), profound changes happen to the surrounding environment. Both the generation ageing and the surrounding environment changing are things that were set in slow but inevitable motion by nature itself.
The chart below shows how the Pew Research center defines the various generations:
This article focuses on what is happening with the millennial generation as they settle into the family formation phase of their lives. Currently the millennials are the largest generation in North America and Western Europe. The second largest generation alive, the boomers, are heading off to retirement.
The millenial shift
Millions of millennials are now entering the phase of their lives where they are moving out of rented apartments or condos and are seeking single family homes in the suburbs and satellite communities. The pandemic has turbo-charged this shift as it is now more common and acceptable for people employed in certain desk jobs to work either fully or partly from home. This makes the daily commutes less onerous and has made the suburbs and ex-burbs much more attractive. People are seeking larger homes with home office setups.
At the same time, the pandemic has paused or slowed the shift of their parents, i.e., "the boomers," from their large suburban houses to downsized homes and condos. This has created a double whammy of the sharply reduced supply of single-family homes and increased demand. This can be seen in the below chart detailing the "Inflation Adjusted S&P/Case-Shiller U.S. National Home Price Index, Adjusted to Today's Dollar." Since the start of the pandemic, the index has shifted into high gear.
I looked through the GuruFocus undervalued Buffett-Munger (UBM) screen to consider stocks which stocks might 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 following three stocks from the list are at the middle stages of a secular housing-related bull thesis which could last for another decade. They look undervalued as well, with strong balance sheets.
| Exchange | Symbol | Company | Predictability Rank | Market Cap ($M) | 10-Year EBITDA Growth Rate (Per Share) | 5-Year EBITDA Growth Rate (Per Share) | 1-Year EBITDA Growth Rate (Per Share) | PE Ratio without NRI | PEG Ratio | PB Ratio | Dividend Yield % |
| NYSE | DHI | D.R. Horton Inc | 4 | 36729.670 | 37.2 | 28.6 | 83.7 | 9.01 | 0.31 | 2.46 | 0.8 |
| NAS | SNBR | Sleep Number Corp | 4 | 1725.022 | 16.9 | 28.4 | 69.2 | 9.77 | 0.35 | 0 | 0 |
| NYSE | LZB | La-Z-Boy Inc | 4.5 | 1572.269 | 14.6 | 11.1 | 30.7 | 12.52 | 1.13 | 2.04 | 1.72 |
D.R. Horton
Homebuilders are an obvious choice for this demographic shift. Of the large U.S. homebuilders, DR Horton Inc. (DHI, Financial) stands out because of its size and valuation. This $36 billion market cap company is the U.S.'s largest home builder. It is selling for a price-earnings ratio of 9 and has a PEG ratio of 0.32. Net debt is minimal. Revenue has grown at the rate of over 20% over the last three years and earnings have grown twice as fast. The GF Value line indicates that the company is "fairly valued."
Another thing to note is the dashed part of the GF value line, which estimates the future growth in GF Value and is steeply positive. I agree with the estimate that D.R. Horton has many years of growth left in this cycle.
La-Z-Boy
When you buy a house, most likely you will be buying new furniture, beds etc. That's where furniture retailers like La-Z Boy Inc. (LZB, Financial) come in.
La-Z-Boy has had a volatile couple of years and has come down from its all time post pandemic highs and much below its long term trend, which is solidly upward sloping.
La-Z-Boy manufactures, distributes and sells upholstery furniture products. It is a producer of reclining chairs and distributors of residential furniture. The company chiefly operates in the United States but also has secondary operations in Canada and other countries. The company's reportable segments include the wholesale segment, which manufactures and imports upholstered furniture; and retail, which sells upholstered and case goods furniture to the end consumer. The majority of the company's revenue is derived from its Wholesale segment. Some of the core brands of the firm include England, Kincaid, American Drew and Hammary.
The GF line indicates this stock is modestly undervalued. The Discounted Cash Flow calculator also indicates a considerable undervaluation.
The company has no long-term debt, and most of the liability is tied to working capital or capital leases for its retail stores.
Sleep Number
Sleep Number Corp. (SNBR, Financial) is a manufacturer and seller of adjustable beds, mattress and related supplies like pillows. It's been a high flyer during the pandemic, but it has now come down below its medium term trend line.
It is flagged as modestly undervalued by the GF Value line. A Discounted Cash Flow valuation indicates a substantial upside potential of 50% or more. The story is similar to La-Z boy - as people relocate to single family homes, they typically 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 history of buying back shares. Last year, it bought back 18.4% of outstanding shares.
Conclusion
Getting on the side of long term demographic changes can be tremendously profitable in the long run. Bill Smead, founder of Smead Capital Management, is fond of housing-related stocks and has commented on this secular shift taking place. These stocks which meet the undervalued Buffett-Munger criteria of "good stocks at good value" could be attractive investments to take advantage of the generational shift, in my view.
