The Secular Uptrend in the Home Improvement Space has Just Begun

Apr 8, 2021

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How many times have we read about predictions of thunderstorms, but the weather ended up being bright and sunny?

In stock markets too, predicting short term price movements is hazardous to say the least.

And that's precisely the reason why market veterans from Warren Buffett to Peter Lynch advise not to time the market.

After all predicting daily/weekly movements is difficult not only in the stock market but also other walks of life.

The two key fallacies in the prediction plan are...

a) Assumptions are based on information which is never static

b) Multiple assumptions make up a prediction and it's difficult to be right on all the assumptions

The key word here would be 'consistency' in forecasting.

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In stock markets, I am sure you would agree without a doubt that Consensus is a dangerous word.

This reminds me of the famous quote by John Templeton...

  • "If 10 engineers tell you to build a bridge a particular way, then that is how you should build the bridge. If 10 doctors provide the same diagnosis, then you should follow the treatment. However, if 10 analysts tell you that a stock is cheap, then you must avoid it".

If timing the market is difficult, how do we make money?

You can focus your investing on certain sectors that are likely to outperform the rest for certain periods.

But how to find them?

That's where the business cycles come in picture. This is different from timing the market in the short term.

I am sure, the buzz word these days in the market is a 'commodity bull run' or the 'real estate revival'.

Every asset class goes through an economic/business cycle with the length. The intensity of the cycle is different for each asset class.

The key is to identify what stage of the cycle we are in. Is it a trough, pick up, maturity, stagnation, etc?

This is different from timing the market.

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In my last editorial, I wrote to you about the real estate cycle and how we are coming out from a long 5-6 year hibernation.

Along with investing in a particular asset class in early stages of the cycle, identifying proxy plays to the can yield superior and safe returns.

Proxy plays are generally the ancillaries to an asset class.

The beauty of some proxy plays is that along with the underlying demand from the asset, the replacement demand of the asset also supports revenue growth.

Take the example of the furniture market (plywood, MDF, laminates, tiles) or the consumer durables (A/C, washing machine, fans) to name a few.

Building materials and home improvement gets a chunk of its sales from the replacement demand in case of a slowdown in the real estate sector.

It is a quasi-consumption play. The demand patterns in the sector mimic the consumer discretionary sector in many ways with respect to the ticket size and the frequency of consumption.

Also, the multiple streams of revenues in the home improvement sector limits sharp drawdowns in case the cycle turns adverse.

In simple terms, if more homes are sold, more furniture, more consumer durables will be sold. Also, if the sales of homes slow down, the replacement demand will be the savior.

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But in life and markets, everything comes for a price. The relative safety which the home improvement stocks provide comes at a higher valuation.

But I guess that's their margin of safety.

So what is going to drive the home improvement space going forward apart from the underlying real estate demand?

With world economies focusing on China plus 1 suppliers, Indian companies are poised to benefit immensely. The government's PLI scheme is also likely to fuel strong exports in the home improvement sector.

And forget the corporates shifting to work from home. Discretionary spending on home improvement is likely to jump manifold in the future.

Stay tuned for more on these and other stocks from me in future editions of the Profit Hunter.

Warm regards,

Aditya Vora
Aditya Vora
Financial Writer

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