Here's the Winner From the 'Great Reshuffling'

The coronavirus pandemic has shifted consumer spending to the home...

After months of lockdown early in the pandemic, many city dwellers had second thoughts about their living conditions. When restaurants, bars, and other desirable parts of urban life were shuttered, a lot of folks who never thought they would leave the city fled.

The rise of "hybrid" or full-time work-from-home models meant the usual downsides of suburban and rural living were no longer an issue.

Before the pandemic, millennials in particular were unwilling or unable to purchase a home. Instead, they enjoyed apartment-style city life.

However, many millennials who had put off buying homes finally fled to the suburbs in 2020.

Now, people of all ages across the country – and the globe – have shifted to more suburban living. And this backdrop is creating opportunities to profit...

For example, home prices have increased 8% and 9% over the past year in the U.K. and Germany, respectively. In the U.S., home prices have jumped 11% year over year.

This has been the fastest growth rate in the past 15 years. Home supply is incredibly tight... And demand can't catch up fast enough.

Online real estate platform Zillow (ZG) even gave it a name – the "Great Reshuffling." Quiet suburban locations are now leading home prices higher. Prices are no longer being driven by city supply and demand.

As a result, many companies have scrambled to take advantage of the shift...

For example, retailers like Home Depot (HD) have done well thanks to the jump in remodeling and home construction.

Homebuilders are also benefiting as home inventory has continued to plummet...

They're scrambling to build homes fast enough to meet this new level of demand. The new living preferences also provide great opportunities for homebuilders, as location doesn't matter as much as it used to when building new homes.

As long as homebuilders are putting up houses outside of cities, they'll print money. Right now, the big concern is simply building enough of them.

Naturally, the largest homebuilder in the U.S. is riding this wave of demand...

I'm talking about Lennar (LEN).

The company had a banner year for profitability in 2020. This isn't clear at first glance, though. To see it, my team and I looked at its financials using our Uniform Accounting method, which cleans up the distortions that plague generally accepted accounting principles (known as "GAAP" metrics).

GAAP reporting shows that the company's return on assets ("ROA") only moved slightly higher in 2020 after a roughly stagnant prior two years. But as you can see in the chart below, Lennar's Uniform ROA expanded from 11% in 2018 to 15% last year...

And yet, based on what the market is pricing in, investors don't appear to be getting the memo...

Most investors who pay attention to stock valuations determine them using a discounted cash flow ("DCF") model. This takes assumptions about the future and produces the "intrinsic value" of a particular stock.

However, models based on garbage-in assumptions only come out as garbage. Therefore, we've turned the DCF model on its head... We use the current stock price to determine what returns the market expects.

In the chart below, the dark blue bars represent Lennar's historical performance in terms of ROA. The light blue bars show Wall Street's expectations for the next two years. Finally, the white bars are the market's expectations for how the company's ROA will shift in the next five years.

Wall Street analysts are expecting Lennar to continue to print money. They anticipate the company's Uniform ROA to remain around 15% through 2022. But despite this expected strong profitability, the market is pricing in Lennar's Uniform ROA to collapse to 7% by 2025. Take a look...

Considering the strong surge in housing demand – which could hold steady for years to come – these expectations are likely too pessimistic.

Uniform Accounting shows how profitable Lennar has been as people move out of cities and into the suburbs. And if the trend continues, LEN shares could be poised to move higher.


Joel Litman

Editor's note: In the wake of the COVID-19 crash, Joel predicted the rise of tech superstars like Square (SQ), RingCentral (RNG), and Advanced Micro Devices (AMD)... even as most experts said to avoid them. Folks who followed his recommendations could've made 816%, 1,560% and 2,247%, respectively. Now, he's issuing a new warning that could be "make or break" for the world's tech giants... Learn the details here.

Further Reading

"It's a trend that will have winners... and losers," Joel writes. As our culture shifts more toward remote work, companies will need to adapt. But right now, the market is distorting how some businesses are valued in the wake of the pandemic... Read more here: The Market Hasn't Yet Price in One of the Biggest Losers of the 'At-Home Revolution.'

Even in fields that require high-level thinking, it's possible to make colossal mistakes. And investing is no different. Be sure you know how to accept mistakes and learn from them to avoid massive losses... Get more here: 'Rocket Science' Takes More Than Just Brains.

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Market Notes



Automatic Data Processing (ADP)... "World Dominator"
Visa (V)... payment-processing giant
Alleghany (Y)... insurance
Axis Capital (AXS)... insurance
Brown & Brown (BRO)... insurance
W.R. Berkley (WRB)... insurance
American Homes 4 Rent (AMH)... rental properties
Hershey (HSY)... "Global Elite" chocolatier
Keurig Dr. Pepper (KDP)... beverages
Dick's Sporting Goods (DKS)... sporting goods
CVS Health (CVS)... drugstores
Ingersoll Rand (IR)... manufacturing
3M (MMM)... manufacturing
W.W. Grainger (GWW)... industrial supplies
Crown Castle (CCI)... wireless infrastructure
Vulcan Materials (VMC)... construction "bellwether"
Waste Management (WM)... trash and recycling


Not many... It's a bull market, you know!