- Harris Kupperman, the founder of Praetorian Capital Management and CEO of Mongolia Growth Group, thinks the prevalence of coronavirus pandemic coupled with an uptick in civil unrest will increase the urgency in which city-dwellers pack up and head for the suburbs.
- From an investing standpoint, Kupperman is approaching the boom in housing differently than one might expect.
- “I think all of the housing supply names are great,” he said, while relaying 3 stocks that top his list.
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There’s no denying that the housing market is red-hot.
In August, existing home sales climbed to their highest level since 2006, purchase applications shot up over 20% on a year-over-year basis, and The National Association of Realtors’ Pending Home Sales Index increased 8.8%.
“The core of what I do is inflection investing — finding a theme that’s inflecting better and get there before anyone else realizes it,” he penned in a recent blog post. “With that preamble out of the way, today the government announced that seasonally adjusted new home sales for August hit 1.011 million. For those keeping score at home, this is the highest that this figure has been since 2006 and up 43% from last year.”
He continued: “I hope you get the point; things in housing are good and getting better.”
Kupperman relays a plethora of factors — low interest rates, affordability issues, and years of leisurely housing construction to name a few — to support his powerful conviction surrounding the space.
But Kupperman’s interpretation and assessment of the housing market is nothing new — and he knows that.
“However, you could have said the same thing a few years ago and not made money,” he said.
For years now, city-dwellers have slowly abandoned their posts in favor of a more suburban lifestyle with a cheaper price tag.
But that was life pre-COVID.
Now, Kupperman thinks that slow and steady slog will soon transform into one of urgency.
“The real catalyst is the sudden panic migration from cities,” he said. “Rather than go into politics, it’s useful to remember that increased crime, arson and tear-gas don’t make things enjoyable in a city — especially when your rent is eating up most of your paycheck.”
To Kupperman, the emergence of the pandemic, coupled with the notion that many larger cities have experienced an uptick in rioting and property destruction, is a game-changer. It’s an essential diagnostic that his call rests upon.
“As a result, there’s been a massive flight from cities by those who can afford to leave,” he said. “As these macro and social trends converge, there’s been a huge increase in demand for single family and multi-family property in the suburbs and exurbs–particularly in more affordable parts of the country.”
Still, Kupperman isn’t interested in buying up real estate or looking to purchase homebuilding stocks to benefit from the trend. He’s using a different approach.
“As many of us have learned, homebuilding is a mediocre business at best,” he said. “Instead, I’m playing this trend through the suppliers to single-family and multi-family homebuilders.”
Kupperman’s approach to the space is reminiscent of the age-old “pick-and-shovel” investment strategy, which focuses more on components and underlying technology rather than the end product itself.
That’s why Cornerstone Building Brands (CNR) looked like a no-brainer to Kupperman. It’s a position he continues to add to.
“CNR is one of the largest US players in multiple verticals including; vinyl windows, doors, siding, trim, gutters, shutters, stone facade and plenty of others–essentially the components of a home,” he said. “While they also have a commercial business that has been suffering a bit lately, warehouses and medical have been white hot.”
What’s more, Kupperman says that Cornerstone is currently earning a little over 20% adjusted returns on tangible assets.
To round out his views on the surge in housing demand, Kupperman also provides BlueLinx Holdings (BXC) and Builders FirstSource (BLDR) as viable pickups, although he says “I think all of the housing supply names are great.”