No Place Like Home

I read once that the sense of smell is the one of the five senses most powerfully associated with memory, a connection to which I can personally attest. To this day the scent of freshly-cut grass takes me back to when I was just a little tyke and the Fridays I would spend outside while my mother worked through various projects in our yard with her gardener. His name was Ernest, and my mother would put much effort into preparing for this one day of the week when he was there to do everything from mowing the lawn (with a manual push mower) to planting new shrubbery and flowers she had collected during the week. Today, Ernest's job has been replaced  by the lawn services of the "mow, blow, and go" variety, where any suggestion of a project list for the day would require major rescheduling and price negotiations. Their business model depends on a quick in and out. My mother's job, it seems, was somewhere along the way replaced by lives too busy to devote an entire day to the yard.

I must have caught a good whiff of grass recently (Zoysia, that is), or more likely I have in mind that my grandson will soon be puttering around in the garden with me, because my thoughts have turned to the efforts we put into caring for our homes and environs. As for a memory not prompted by olfactory experience, I recall the trend known as "cocooning," posited by futurist and author Faith Popcorn in the early 1990s. Popcorn's thesis postulated that people would put more resources--time, energy, and money--into making their homes more liveable and comfortable ("nesting" is another term for this), and thus would spend more time away from the public sphere. She also predicted that people would shop at home online well before we all started browsing for Christmas gifts in our pajamas. My wife and I frequently talk about how much we enjoy working together on those little projects in the yard and in the house that make our place more enjoyable for us and more inviting for friends and family. Cocooning does not mean being a hermit or a misanthrope, but I can tell you that the more we work to improve our home, the more we want to stay around and enjoy the fruits of our labors--sometimes just the two of us, often with good friends and family. And let's face it, we could all come up with a litany of reasons not to go out: crime, traffic, crowds, armed citizens with short tempers, unmannerly and nonchalant service people, etc.

It would be folly to make investment decisions based solely on the musings of futurists, whose wrong predictions cost them only credibility and not real dollars. Even with cocooning put away in our box of fanciful notions, though, we still face the very real issue of the housing market and its ensemble of players who have had the wind sucked right out of their sails for at least five years now. Disbelief might be the best word to describe the reaction of investment commentators to the notable surge this year in the home-builder stocks, and such disbelief is good news for the sector's future returns. As investors, we all need to stay in touch with our "inner contrarian," because the future of any sector or stock depends on there being some skeptics on the sidelines. Once everyone has become a true believer, there is no one left to buy. If you are waiting for someone to sound the "all clear" on the housing sector, then you will miss the best returns. So, I am happy to put out the welcome mat for the skeptics. The market is always telling us something, though, so we need to consider the year-to-date performance of some of the home-builder stocks: MDC Holdings (MDC, $34), up 90%; Lennar (LEN, $32), up 65%; Meritage Homes, (MTH, $37), up 60%; Toll Brothers (TOL, $32), up 58%; DR Horton (DHI, $18), up 46%. If we are seeing a genuine recovery in housing, then I would expect that this sector has more room to run. In late July Goldman added MDC to the firm's Conviction Buy list and raised the price target from $34 to $50.

We'll also note that Home Depot (HD, $56) has been strong this year, up some 34% since January. That brings us to the place where the housing recovery meets whatever validity there might be to the cocooning trend. This also gives us the chance to remind ourselves of one of the basic tenets of investing, which is that great companies do not always make for great stocks. I suspect that divergence might apply to Williams Sonoma (WSM, $38) and Scotts Miracle-Gro (SMG, $43), two companies whose products I love for cocooning, but whose stocks I can't really get excited about--but my enthusiasm may be stirring. My wife still gives me a hard time about the $200 toaster and $200 coffee maker (it grinds the beans!) I bought from Williams Sonoma years ago. The toaster recently quit working (and nobody gets toasters repaired anymore), and my wife found a replacement that works even better--for about $39.99 at Target (TGT, $64). The grind feature on the coffee maker quit working, and it always bugged my wife that the thing was too tall to slide beneath the overhead cabinets above the counter top. So, she bought us a shorter one for about $50 at Costco (COST, $95)--it doesn't grind beans, which is fine because we don't buy whole beans often, and it slides perfectly into place, just where my wife wants it. So, I just wonder who is going to be buying all of those expensive kitchen toys from WSM when the alternatives are abundant and less expensive. But...there's more to the WSM story, namely the company's Pottery Barn and West Elm businesses, both of which offer home furnishings and accessories at reasonable prices. Also, WSM just reported results for the second quarter, with both earnings per share and revenues coming in above expectations. That's encouraging, and the stock is hitting a new 52-week high in Tuesday's after-hours trading.

It would be almost impossible to walk into any garden center and not see some of the products made by Scotts. The company has done a good job of building the Miracle-Gro brand, and it really doesn't face the "$200 toaster" problem. The stock, though, has suffered this year. Consumers just haven't been spending a lot on such products lately, and it is perfectly understandable that it's pretty easy to skip fertilizing the lawn if you're worried about your job and the economy. Both WSM and SMG stand to benefit from a robust and sustained recovery in the housing sector, but we just haven't seen indications of that in their stock prices the way we have with the home builders. And I can't think of any reason why SMG would be a "value trap" candidate--it's not a Best Buy or a Radio Shack, two companies whose downfalls make perfect sense even without looking at their financial statements. Macro trends don't always translate into success at the micro level, but I suspect that all of those retiring baby boomers might be loading up on Miracle-Gro as they plan on spending their golden years puttering around the garden.

A continued recovery in the housing sector would be just what this economy needs--at least that cylinder would be firing as the others seem on the verge of sputtering. As investors, we need to be aware of emerging trends and tuned into the companies that might benefit. In other words, wake up and smell the coffee, even if the coffee maker didn't grind the beans. Better yet, just kick back and sniff the grass (Zoysia, of course).

Life is short. Get busy.

Jim


Disclosure/Disclaimer: My family members and/or I own shares of MDC, MTH, DHI, HD, and COST. Individual stocks are mentioned here for the sole purpose of illustrating investment concepts, and nothing stated here should be construed as the advice to buy or sell any security.