Dear Fellow Investors,
We believe money always goes where it gets treated the best. A recent article detailing the most attractive places in the U.S. for millennials to buy a house included the following cities1, and that has implications for investing, not just nesting:
1. Des Moines, Iowa
2. Grand Rapids, Michigan
3. Wichita, Kansas
4. Omaha, Nebraska
5. Toledo, Ohio
6. Dayton, Ohio
7. Oklahoma City, Oklahoma
8. Little Rock, Arkansas
9. St. Louis, Missouri
10. Syracuse, New York
The article shared that these cities have high wages relative to home purchase prices. What are the implications of these cities and others like them around the country being so economically compelling? How can the long-duration investor participate in the movement of money and population to these financially attractive places? Which companies can benefit from the gravitational pull of household formation moving to where their money gets treated the best?
Our long-time readers are aware that there are 89 million millennials who will go through their prime household formation in the next fifteen years. Even though there are variables that have pushed back the age at which they form their household, there are 35-40% more of them than the Gen X group. In other words, you have a huge number of people who will go from single and childless to married and parenting. Most surveys show that kids drive people out of apartments into single family residences.
These millennials are the most educated group of 22-39 year-old people in U.S. history and much of their early employment is congregated in expensive coastal cities in tech jobs or tech-related jobs for non-tech companies. These 20-something boys want to be around single 20-something girls where the best early career jobs and wages are. Hence, they have flocked to Los Angeles, the San Francisco Bay area, Portland and Seattle on the West Coast and Boston, New York, Washington, D.C. and Miami on the East Coast.
Unfortunately, the vast majority of these tech workers and tech workers in non-tech industries see their income growth driven in their early career by job swapping. Millennials will have more employers in their first ten years out of college than my parents’ generation had in their whole career. Forty years ago, the average was three employers in your entire working career. Three employers happen for many millennials by the time they are 30 years old.
Therefore, household formation over the next ten years will bump up against stagnant income levels for millions of Americans in their 30s. In the same way that millennials swapped jobs in their 20s, they could soon swap geography for an affordable place to live, work and raise a family. We would argue for this because money would go where it gets treated the best.
There are numerous investment themes which would come from the U.S. moving out of the Seth Rogen/27-year-old single male world of the last ten years and graduating to the married with children world which all prior generations eventually lived. First, economic growth is much easier to create when household formation is occurring. Necessity spending explodes on homes, furnishings and kids. Millennials will borrow to buy houses and cars to fit their families.
The major banks should be big winners in this environment. Millennial demand for money and the economic growth they propagate could get us off these historically low interest rates. The chart below gives you some indication of what demographics could do to the household debt service ratio which has been bumping along 40-year lows.
Past performance is no guarantee of future results. Source: Bloomberg.
Second, tech investing in an era of singleness and anemic economic growth could lose its luster as the composition of millennial spending moves towards the home. We have joked that single millennials pay rent to apartment owners, eat Chipotle burritos, drink craft beers and liquor, and buy every new Apple (AAPL) device. We expect this list will soon gravitate to house and car payments, gasoline and paying the hospital and doctor for delivering babies.
Research from Fundstrat (seen below) shows that spending on kids should explode the next ten years as millennials reward their parents with grandchildren. Purchases of kids apparel, shoes, toys and entertainment will help drive this explosion. As the grandfather of 10 kids under 10 years of age, I can tell you firsthand how much spending increases.
Past performance is no guarantee of future results. Source: Fundstrat, “The Long Game,” 2019 Strategy.
Companies to Own:
Bank of America (BAC), JP Morgan (JPM) and Wells Fargo (WFC) look very cheap to us and sport juicy-looking dividend yields. They have gained control over the deposits of millennials via the best mobile technology. This will, in turn, allow millennials to be excellent liability customers on loans and credit cards.
Target (TGT) owns the above-average income, college-educated female shopper. Whether it is feathering the nest via the Magnolia brand or putting Carter’s cloths on the kids or putting a Disney store inside the store, Target looks thirsty for this movement to less expensive cities for household formation. Target trades for around 17-times earnings and pays a copious dividend. Notice how midwestern this list is and remember that Target is headquartered in Minnesota with great access to where the money has been moving in an attempt to get treated the best.
The irony of money moving to where it gets treated the best from a demographic standpoint could dovetail with the historical positive bias that value investing has had. Value as a category in large cap U.S. stocks has outperformed growth stocks as a category in 83% of the ten-year rolling return periods since 1926 (Ibbotson). Many of the companies which could benefit from the swapping of geographies by millennials are among the most attractive stocks in the value investing category. This internal migration could spur a revival in value investing regardless of what forward returns end up being. Remember, money being treated the best doesn’t always means high single-digit or low double-digit returns!
In conclusion, we believe that millennials will move to where their money get treated the best. We also believe that many of today’s best investment opportunities are tied to their comfort with mobility and their willingness to move around the country. If we trust the demographics, we would like to think this could cause our capital to get treated the best, as well.
The information contained is not be construed as personalized or individualized investment advice and are subject to change. Past performance is no guarantee of future results. Bill Smead, CIO and CEO, wrote this article. It should not be assumed that investing in any securities mentioned above will or will not be profitable. Portfolio composition is subject to change at any time and references to specific securities, industries and sectors in this letter are not recommendations to purchase or sell any particular security. Current and future portfolio holdings are subject to risk. In preparing this document, SCM has relied upon and assumed, without independent verification, the accuracy and completeness of all information available from public sources. A list of all recommendations made by Smead Capital Management within the past twelve-month period is available upon request.
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