Sometimes, when the stars align perfectly, you feel like you can grab shares of a monster stock that's largely under-appreciated. After evaluating my options, I think I've found that stock in Lumber Liquidators (NYS: LL) , a small-cap, hardwood flooring specialist in the ugliest of all industries right now: housing.
A housing recovery is just around the corner
When it comes to taking the pulse of the housing industry, I don't think there's a much better source than our own Morgan Housel. Morgan has spent much of the last two weeks showing us that although prices of housing may still be suffering, new housing starts -- which account for a lot of the jobs that were lost over the last three years -- are bound to pick up before long.
In general, it makes sense for the United States to be producing roughly the same number of houses as there are families being formed and ready to move into them. Leading up to the crash, that certainly wasn't the case: Too many people were buying house after house on credit, while others were building homes far above their means. We all, of course, know what that led to.
But since then, things have changed. A combination of new families (households) forming, anemic new-housing starts, and even some foreclosed homes being bulldozed have all led to a rather quick reversal. To quote Morgan directly: "During the bubble we were building about 2 million homes a year while adding 1.5 million new households per year. Today we're building 500,000 homes a year while adding around 1 million new households per year."
It doesn't take a math whiz to see that sooner rather than later, we're going to have a shortage. If you'd like a visual representation, check out the U.S. housing starts versus the U.S. population.
Sources: Federal Reserve and Morgan Housel.
Whereas the long-term average sits around 0.006, we're now producing only a third as many houses right now relative to our population. Some might even argue this could lead to a tripling in new-housing starts.
Why Lumber Liquidators?
Of course, building a case for new-housing starts isn't the same thing as saying that Lumber Liquidators will profit more than the others from this trend. The company has some well-financed behemoths to compete with, including Home Depot (NYS: HD) and Lowe's (NYS: LOW) .
But by focusing solely on providing quality hardwood flooring at the cheapest possible price, Lumber Liquidators is using its size to its advantage. Home Depot and Lowe's are forced, by design, to set up shop in high-traffic areas with stores that are several thousand square feet and staffed by hundreds of employees.
Lumber Liquidators heads in the other direction entirely, opening up their stores in low-rent areas, with bare-bones stores (how much do you really need to show off hardwood flooring?) being run by just one store manager and two or three sales associates.
If this were a normal consumer purchase, I'd say such a bare-bones approach would hurt, rather than help, the company's brand. But the reality is this: When consumers are building or remodeling a home, they understand that it's worth the effort to shop around for the best price. And there's no doubting that Lumber Liquidators offers the best price.
If you don't believe me, here's what a little homework turned up. Specifically, I went looking for the price per square foot of solid red oak flooring at 3/4 inch by 4 inches (or the closest I could find) to cover 2,000 square feet.
Price per Square Foot
Source: Company websites.
With savings like that, I think customers will go out of their way to find their local Lumber Liquidators.
As they become more aware of the value proposition available at LL, I also think the company will be able to start consolidating the highly fragmented hardwood flooring market, which is dominated largely by local mom-and-pop stores.
And because the average new store is profitable in just three months, the company can fund its rapid growth without needing to worry too much about debt. That's the kind of growth story I want to be a part of.
If, for some reason, you still aren't buying into the housing recovery, I suggest you take a look at another burgeoning industry -- mobile phones. We here at The Motley Fool have created a special free report: "3 Hidden Winners of the iPad, iPhone, and Android Revolution." Inside, you'll get the names of three off-the-radar companies that are benefiting from our growing reliance on smartphones. You can get a copy of the report today, absolutely free.
At the time thisarticle was published Fool contributor Brian Stoffel owns shares of Lumber Liquidators. You can follow him on Twitter at @TMFStoffel.The Motley Fool owns shares of Lumber Liquidators Holdings. Motley Fool newsletter services have recommended buying shares of Lowe's Companies, Lumber Liquidators Holdings, and Home Depot, as well as writing covered calls in Lowe's Companies. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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