Hey folks,
I decided to focus today’s blog on some investment ideas that I have for the current market environment: REITs, homebuilders, BigMacs, cheap products, and the basics.
Time to buy REITs?
Historically, from 1960 to 1995, average home ownership rate was 64%. Since 1995, it has crept up to 68%. On face value, 3% might not seem high, but it actually equates to about four million homes. Today 111 million are occupied in the US; and, of these, 68% are owner occupied. This implies 75 million homes are owner occupied. For this figure to return to the historic mean of 64%, it would have to reduce to 71 million homes. Obviously, this won’t happen overnight. You can find these figures on (http://www.census.gov/).
According to the US Census Bureau, 2.1 million homes are sitting on the market waiting to be sold. When you add the four million homes, as mentioned in the above paragraph, there is a potential for 6.1 million homes sitting on the market. That’s a lot of inventory, especially when you incorporate that new home buyers are facing tighter loan requirements and lower LTVs. That should mean prospective new home buyers will be renting a lot longer than previously estimated as they save.
So, with existing home buyers exiting the market because they can’t really own their homes and new buyers forced to rent longer, I believe two things:
- Homebuilder industry will continue to suffer for the near future due to excessive inventory.
- Rental market will strengthen over the next few years.
I think there is a play here to short the homebuilders and go long on rental focused REITs
Cheap Food and Cheap Products
As I said in an earlier post, Americans are getting pinched in their wallets due to a variety of factors: high oil and gas prices, inability to refinance their homes, difficulty in paying their mortgages, increase in unemployment, and stricter and tighter lending standards to name a few.
As a result of these challenges, people are looking for cheaper food and lower cost products, while maintaining a reasonable amount of quality. Two companies I have seen performing well in this difficult market are McDonald’s and Wal-Mart. Take a look at their one-year charts and you will see that they are in an uptrend. I think at current prices, you could make at least 10% over the next year. However, if the bailout package does not get approved, there is a high probability we will see a big drop in the market as we saw on Monday. I currently own both of these stocks and am planning to wait to see what happens with the bill since there is a chance to buy these stocks at a lower price.
The Basics
A lesson I have learned this year is that the best companies to own are those that have sustainable strong cash flow and low and manageable debt balances. These are the companies that can weather industry cycles.
Some of the least volatile stocks this year are the basics: non-durable household goods, food products, and brewers. These include companies that make toilet paper, toothpaste, batteries, cereal, and beer. The commonality in this group is that all have strong cash flow and low debt. So, the tight credit markets aren’t affecting these companies.
I recommend you take a look at the Vanguard Consumer Staples ETF (VDC), which holds a nice list of strong cash-flow companies that make products people buy regardless of the current market conditions.
These are my ideas for today. Hope your week is going well and will write more soon…
ciao,
Moolah
