I keep a list of powerful social and demographic trends and likely beneficiaries in my office.
I am well aware, for example, of things like the emerging field of artificial intelligence, the growing need for infrastructure, and the wild American spending on pets.
Not to mention, the ever-increasing global middle class, the aging of the population, and other massive shifts will be a source of phenomenal profits in the years and decades ahead.
At first glance, one would think that relying on my Sabermetric data to select stocks would mean that I miss many of these trends.
Nothing could be further from the truth. I spend most of my days either running data screens and tests or reading.
I read across a broad spectrum of topics, which include the financial markets, the global economy, and international politics. And I delve into industry-specific publications and academic papers on a wide range of issues.
Doing this allows me to develop a broader picture of the world, and spot trends that will change the world and the markets.
On this list of trends in my office, I record the Sabermetric value of all these companies on my radar and the price level where they will become bargains.
When I find a great company at a bargain price in an industry that is experiencing powerful social and demographic tailwinds, it becomes difficult NOT to make money.
As Millennials Leave the Big City, Expect Builder Stocks to Rise
I had an interesting discussion the other day with my son-in-law (the father of the world’s most beautiful and exceptional granddaughter) about investing in these powerful demographic and social trends.
My son-in-law is Garret Baldwin, and you may know him already for his contributions to Money Morning. He’s an economist with more degrees than a thermometer.
Our casual conversations over an after-dinner bourbon usually run the gauntlet of economics, stocks, finance, politics, and of course sports.
During this most recent conversation, Garret and I were discussing a powerful trend that we see developing, which is actually impacting him and his family.
It is no big secret that the housing market has not had a good year.
The gap between new and existing home sales is as wide as it has ever been. Along with this shortage of homes, we are seeing rising costs, higher mortgage rates, and a labor shortage in construction trades. This quadruple whammy is making it difficult for most folks to afford a home right now.
That’s horrible news for builders. Just ask Wall Street. The conventional wisdom has analysts downgrading the home builders, and the big funds and institutions are selling shares of builders hand over fist right now.
The SPDR S&P Homebuilders ETF is down 20% so far this year, and some of the individual builders have gotten hit a lot harder than that.
Obviously that’s horrible, and conventional wisdom says that investors should avoid these stocks at all costs. In the short run, that may be true. But over the long run, one developing trend could create enormous profits for those who spot it and jump in when the price is right.
Millennials have finally entered the housing market and right now comprise about one-third of new home buyers. They are about a decade later than preceding generations, but they are finally getting the homeownership bug.
Now add in the fact that the preference for downtown living in the big city is also showing signs of reversing. As this generation is finally getting married and having kids, the need for less traffic, good schools, and easy access to grocery stores and daycare centers, is becoming far more important than being close to the downtown art and entertainment scene.
Increasingly, we are going to see millennials and Gen Y members moving out of the big city to smaller cities, towns, and even the suburbs. This is going to create a lot of demand for new homes, especially the first-time buyer and first move-up buyers.
Now keep in mind, adding new demand to market that already has an affordability crisis due to a lack of supply would seem to be a big problem. But that would only be true if the marketplace were not so good at solving problems.
This new demand is going to catalyze opportunities for builders that specialize in the lower end of the new home marketplace. The demand is going to last for a long time and drive profit growth and stock prices to levels many times higher than today.
To Play the Housing Boom, Consider These Two Stocks Wall Street Has Overlooked
I am currently tracking two builders that make the grade as quality companies in my Sabermetric stock selection system.
Both M/I Homes (MHO) and William Lyon Homes (WLH) specialize in first-time and first move-up homes, and both have the financial strength that I look for in stocks using my data-driven methodology.
They have not yet fallen to the levels where they are buys based on the numbers, but they will be soon if Wall Street keeps selling the current poor supply-demand situation.
This happens all the time with the Street. The first-time buyer builder’s baby will be thrown out with the housing sector bathwater, and when that happens, I will pounce on the stocks.
It is going to take a decade of very high low-end home building to bring the supply-demand situation back into line, and the builders that help meet the growing demand are going to make a fortune.
So are those investors who accumulate these stocks at bargain prices.
Ignoring emotions and stories, my sabermetric system will tell me the right time to jump into these stocks and position myself for enormous profits.