WINDSOR, ONTARIO – July 29, 2015 – The Radical Consumerist, is an Investment Newsletter focused on discovering and showcasing high-yield investment opportunities along with breaking news and analysis geared at maximizing returns for ordinary investors in the consumer products space.
The middle and lower classes in America are struggling and experiencing declines in real income. The United States is the only developed economy that has the distinction of more people living on less than $50 per day than a decade earlier.
According to a Pew Research Center report, the share of Americans living on more than $50 a day fell to 56% in 2011 compared with 58% in 2001. Median income also fell in the U.S. to $56.44 from $58.56.
Along these lines, median income fell in the United States from $53,646 in 2001 to $50,054 in 2011. This decline puts the U.S. in the same group as Nicaragua, the Philippines, Dominican Republic, El Salvador, Bulgaria and Serbia.
On the other side, housing is improving. The housing market is one of the most important in any economy including the United States. Housing resales in June rose the highest levels in eight and half years. Pent up demand has helped drive sales. Additionally, new housing starts and building permits also surged close to eight year highs in June. But this may be the housing markets own undoing, since incomes have not increased as quickly as the costs associated with living in a home.
An improving economy driven by the housing market’s “wealth effect” should help a restaurant chain like Ruby Tuesday’s (NYSE: RT) and apparel and accessory retailer Aeropostale (NYSE: ARO). But how can investors benefit from this improvement in housing and the knowledge that the middle class has less money to spend? Tuesday Morning (NASDAQ: TUES) is a deep discounter and off-price retailer that can gain share in a market with a middle class that has less disposable income. However, there is a company called Wisdom Homes of America (OTC: WOFA) that produces manufactured homes that is uniquely positioned to benefit from both of these trends, in the long-term.
Manufactured homes are more cost effective solutions to building single family houses on a large scale. By approaching home construction much more like building a large machine, a company like WOFA can take advantage of economies of scale and mass production methodology.
WOFA has a scalable business model and a multi-year strategy that can not only benefit from a potential decline in the housing market but gain market share from other types of housing construction. Manufactured homes are a $4.1 billion industry in 2014 compared to $3.1 billion in 2011. It increased by 11,000 units over four years to 63,000 in 2014 based on data from the Manufactured Housing Institute.
In addition to strong industry fundamentals, WOFA has an excellent marketing plan to gain share and increase acceptance of manufactured housing. Management states it plans to open 30 retail centers in the next five years in the U.S., and it believes each can generate $2.3 million in annual sales. We forecast net income of $69 million in five years based on this revenue estimate.
In order to complement its retail channel, it plans on offering subdivision sales. It plans on creating 20 – 40 lots in existing subdivisions and selling them for a consistent profit. The Company is approved with multiple mortgage service providers, and is in the due diligence phase of creating its own mortgage origination division.
We view WOFA as a great long-term play on two key trends, the tighter budgets of the middle class in America and the renewed growth in housing, especially if the housing market experiences a downturn.
While there is discussion on what the new normal is for annual housing starts, most believe it is between 1.25-1.5 million starts. In June, there was a seasonally adjusted 1.174 million annualized starts. This remains below the normalized level. Typically, housing follows a cycle where starts are below normal, then fall within the normal range and then exceed it for a period of time. Pent-up demand can lead to an extended cycle in new builds. Starts have remained below normal since 2007. This is positive for WOFA.
Ruby Tuesday’s (NYSE: RT) had stronger than expected guidance from fiscal 2016 and reported solid results from 4Q15. This drove the shares up and made us also more bullish on its long-term prospects. The improved outlook is also a positive indicator for upward trends in consumer purchasing.
Aeropostale (NYSE: ARO) also finally had some positive news when Dana Messina announced a 14.7% stake in the retailer. His firm, Aria Partners, specializes in buying apparel and retail stocks. The company has taken a beating with its current value at just $114 million versus over $2 billion in 2010. The stock may have found its bottom and things may start to turnaround.
Tuesday Morning (NASDAQ: TUES) sells upscale decorative home accessories, housewares, and season goods. It operates 810 discount retail stores in the US in 41 states. The company’s position as a discount seller in the home goods category means it can benefit from improved housing trends. As home sales increase, people will look to furnish these new homes. Because median incomes are down, consumers will look for greater value by shopping at stores like Tuesday Morning. It is a stock that can work for the same reasons as WOFA.
The housing starts and its unique retail business model should help it target low-to-middle income buyers. If it can deliver on its plan to open 30 retail centers and expand into selling manufactured homes in existing subdivisions, early investors in the stock should be rewarded. The upside potential for Wisdom Homes of America (OTC: WOFA) is substantial at this point.
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