May 06, 2015
Amy Paternite, a real estate agent in Maplewood, New Jersey, is getting used to hearing from clients in their late twenties and early thirties who say they never thought they would leave New York City for the suburbs. Parenthood – or a second baby on the way – has changed their minds.
"They still want good restaurants, but now it's also about space, affordability and being able to send their kids to a good public school," said Paternite, 45, who said that about 70 percent of her business now comes from young families who are making the move from Brooklyn or Manhattan.
Millennials, typically defined as those born between 1981 and 1997, may be turning into their parents after all. A generation that's been stereotyped as urban, single and aghast at the idea of a car-based life in the suburbs is starting to age, prompting fund managers to bet on companies that should benefit if the U.S. birth rate reverses a six-year slump.
With 4.3 million millennials turning 30 this year and the number set to jump to 4.6 million by 2020, there will soon be more adults in their early 30s than at any other time in U.S. history, according to an analysis of U.S. Census data by Wells Fargo.
As a result, fund managers are increasingly buying home builders, mortgage lenders and baby clothes makers that stand to benefit as millennials spend less on themselves and transition to parenthood.
With 4.3 million millennials turning 30 this year and the number set to jump to 4.6 million by 2020, there will soon be more adults in their early 30s than at any other time in U.S. history -- Wells Fargo analysis.
"Look at what a 25-year-old single person spends money on, and look what a 35-year-old with kids spends money on," said Bill Smead, portfolio manager of the $1.1 billion Smead Value fund. "This is a chance to get rich on that transition."
Smead, whose portfolio is about two-thirds invested in companies that he says will benefit as millennials reach parenthood, holds homebuilder NVR Inc, mortgage lenders such as Wells Fargo & Co and Bank of America Corp, and local-advertising plays such as Gannett Co, which owns car-shopping website Cars.com.
In the housing market, meanwhile, millennials made up 32 percent of sales in 2014, up 4 percentage points from two years earlier – making them the largest segment of buyers, according to the National Association of Realtors. Those homes are more likely to be purchased in the close suburbs rather than in urban cores, according to an analysis of U.S. Census data by real-estate listing firm Trulia, which found that millennial growth in big-city suburbs was 1.4 percent in 2013, compared with 1.2 percent growth in dense cities.
Philadelphia, for now, may be bucking the trend as millennials have been largely responsible for a wave of neighborhood gentrification and increasing home prices in the city.
The generation once seen as shunning cars accounted for 27 percent of new auto sales in the U.S. last year, up 9 percentage points from 2010, according to a recent study by JD Power and Associates.
"Especially in the older millennials, we're seeing a move towards more traditional patterns, just on a delayed time frame," said Sarah House, an economist at Wells Fargo.
Phil Orlando, chief equity strategist at Federated Investors and head of its Global Allocation fund, said he was not put off by the fact that U.S. home ownership rates hit a 20-year low in the fourth quarter. He has been adding shares of home improvement and other housing-related companies, anticipating a wave of suburbanization now that the financial crisis has passed. Nor is he deterred by the fact that the number of births in the U.S. declined for a sixth consecutive year in 2013, to 3.93 million.
"The fact that you've got these millennials delaying life and not getting married and not having kids is not a function of the fact that they are completely different from every other generation," Orlando said. "It's a reflection that they went to college and ran up debt and couldn't find a job. Now that the economy is starting to improve for these folks, household formations have literally gone vertical."
Household formation rose by 1.7 million in the fourth quarter from the year before, and increased 1.5 million in the first quarter from the same time frame in 2014, according to the Commerce Department.
That, in turn, should lead to a jump in demand for the products that cater to suburban life, Orlando said.
"As individuals get married and buy houses and have kids, you need car seats and cribs. That's the next layer of stuff that's been delayed since '08," he said.
WALL STREET FOCUS
It's a surprising turnaround for a generation that Wall Street is desperate to reach. Over the last decade, the number of mentions of the millennial generation on quarterly corporate earnings calls has jumped from just one in all of 2007 to more than 100 in the most recent earnings season alone, according to Thomson Reuters data. Greg Creed, the CEO of Yum Brands Inc, owner of Taco Bell, told analysts in March that “the muse of a Taco Bell is a 22-year old."
Stephen Dodson, manager of the $12 million Bretton Fund, is skeptical that there is that much of a millennial mindset. Instead of any generational habits, the term millennial could often be ascribed to any upwardly mobile city-dweller, he said.
Dodson, whose fund performance is in the top third of large-cap funds tracked by Morningstar over the last year, has large positions in baby-clothes retailer Carter's Inc, parent company of OshKosh B'gosh, and Gap Inc, owner of baby Gap stores. Shares of Carter's are up nearly 15 percent for the year to date after the company reported strong first-quarter earnings. Gap, meanwhile, has seen its shares dip 3.5 percent over the same time.
Another company that Dodson is looking at, but hasn't yet invested in, is MEDNAX Inc, which staffs physicians for hospital delivery rooms, including neo-natal care and anesthesiologists. Shares of the company are up almost 9 percent so far this year.
"This company is about as direct investment you can make on the birth rate increasing," Dodson said.