Opinion: Trade in ‘suburban shelters’ is about to reverse – and these stocks will suffer


One of the biggest investment stories of the COVID-19 pandemic has been the boom in consumer discretionary stocks with a ‘shelter in the suburbs’ theme. From e-commerce platforms and home improvement stores to furniture and household goods dealers, many of the top-performing businesses have adapted to this flavor.

Take the Vanguard Consumer Discretionary Index Fund ETF VCR,
+ 0.60%
which jumped more than 90% from March 2020 to March 2021. This was thanks to components like Lowe’s LOW home improvement stocks,
+ 0.12%
and Home Depot HD,
alongside retailers like TJX TJX,
+ 0.06%.

Lately, however, performance has started to slow down for many of these names. In fact, since April 1, we’ve seen these three stocks drift slightly into the red even as the S&P 500 SPX,
+ 0.21%
has shifted to about 6% over the same period.

And some fear this is just the beginning. As a Wall Street insider recently said in an interview with Bloomberg, a “huge relaxation”Arrives for home inventory, including hardware stores and home goods dealers.

While some major jobs in the “suburbs” are still relatively stable, signs of difficulties are already appearing on the sidelines. Century CCS Communities,
and Dream Finder Homes DFH,
two mid-tier single-family home builders have seen their shares drop to double digits in the past month. On the furniture side, the household appliance giant Whirlpool Corporation WHR,
and the Nordstrom JWN department store,
+ 0.38%
are down sharply from their spring highs.

Here are five big reasons why:

The uthe upgrade cycle is complete

Last summer, white-collar workers stuck at home took note of overdue projects and took advantage of the opportunity to easily meet contractors. But in many ways, this growth is not sustainable.

Consider the type of purchases owners made according to NPD group data. Faucets, kitchen cabinets and even toilets were some of the most popular products sold in 2020. Needless to say, even the most spending homeowners won’t follow this cycle of upgrading kitchen and bathroom renovations. bath on an annual basis.

The same goes for furniture and other household items. Internet giant Comscore recorded the highest number of related website visits in history in May 2020 with 133 million Internet users who buy items for the home. Again, a new sofa or lamp is not an annual purchase – so this trend seems unsustainable for much longer.

Valuations are stretched

Speaking of post-pandemic peaks for housewares suppliers, we’ve seen financial data confirm these sharp increases via increased profits and sales. However, we have also seen the inventory of many Linked Merchants increase even more – stretching their valuations from historical standards.

Take TJX. Currently, this discount retailer has a forward price-to-earnings ratio of over 26, compared to a forward P / E of just 21 in spring 2020. Its forward price-to-sales ratio is now 2.1 to 1.4.

In addition, the valuations of previous favorites like TJX are also out of step with those of their peers. Consider that the S&P 500 Global Index Futures P / E is currently 22, and other similar names like Macy’s M,
+ 0.32%
and BIG jackpots,
in fact have forward P / E ratios well below 10. You can argue that TJX is unique, sure… but you might also want to know what “fair value” looks like for many other stocks outside of fashionable shops at home. now.

Delays and shortages

The future growth of pandemic-fueled peaks in these stocks is of course not impossible. But given the supply chain disruptions, that seems highly unlikely. There are a multitude of reasons for these delays, including overseas shipping delays as well as capacity and production shortages that affect many industries, but “stay-at-home” inventories appear to be particularly hard hit.

Renovation products are simply nowhere to be found, with about 94% of builders reporting “at least serious appliance shortages” according to the National Association of Home Builders. Another 93% lack lumber and 87% say it is difficult to get windows and doors.

Even if you can overcome past demand problems without the raw materials to work with, it is very difficult to see future growth in this category.

Inflationary pressures

For people who haven’t already raised a contractor’s money or made peace with prolonged delays for their expensive new furniture, there is currently one big enough drag for new buyers: inflation.

The cost of living as measured by the Consumer Price Index jumped 0.6% in May to an annual rate of 5%. It was not only higher than expectations, but the fastest pace since the summer of 2008. Inflation risks were so pronounced that the Federal Reserve publicly said it could speed up the timing of rate hikes. interest expected to keep the risks secret.

Inflation is not always a death knell, of course. But it has historically eroded purchasing power and may reduce some of the spending on “stay home” stocks we’ve seen over the past year.

The pride of fairness

Speaking of searing inflation: In May, the median US home price topped $ 350,000 for the very first time, rising 23.6% from 2020. Additionally, a Realtor.com poll showed about a third of selling owners expect more than asking price, and roughly the same amount is expected to be offered within a week of listing.

Part of this is justifiable. Much has been written in recent years about the shortage of supply in attractive markets, and it is important to recognize that working remotely from the pandemic has indeed created a disruptive introspection in why do people live where they live.

Lily: An inflation storm is approaching for the US housing market

But here’s where it gets tricky: Homeowners who have already spent the expected premium on the price of their home well in advance. According to Freddie Mac, about $ 152.7 billion in equity loans were taken on U.S. homes last year, a massive 41.7% increase from 2019 and the highest dollar refinance amount since 2007.

Anyone remember what happened to the real estate market in 2007? Or the same sense of entitlement of the seller back then? There is no clear sign of a bubble bursting just yet, but there is a real risk that US homeowners are overly optimistic about their home’s value – and it is possible that this loan on value. Free-for-all home ownership just won’t be viable any longer.

Jeff Reeves is a MarketWatch columnist. He does not have any of the titles mentioned in this article.


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