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Move Over, Baby Boomers -- This Group Of Consumers Wants the Spotlight

Tuesday, September 03, 2013 8:30 AM

In the 1980s and '90s, an investor theme emerged that likely played a role in a 20-year upward move for the stock market.

In that era, baby boomers reached financial maturity, spending hundreds of billions of dollars on housing, leisure, retirement savings plans, transportation and many other categories. Financial pundits sought ways to suggest profitable ways to track baby boomer spending, coining the phrase "boomer investing."

Of course, as the oldest baby boomers (born right after World War II) are now near retirement, and younger boomers pass their peak spending ages as well, it's time to shift gears and focus on the next massive demographic trend. The "millennials" or "echo boomers," mostly born in the '80s and '90s, which are set to overtake the economy. How big is this group? Demographers suggest that there are (or were) 77 million baby boomers. The millennials: 82 million.

Skinflints Or Spendthrifts?
Across the national media, you'll read many stories about how these millennials are flat broke, unable to move out of their parents' homes, and saddled with lots of student loan debt and limited job prospects. To be sure, this group is struggling right now. And some will tell you that this group will never have the financial prospects of their parents' generation.

Yet we've heard this story before. Back in the 1970s, fears of permanent economic stagnation led some demographers to suggest that the "baby boom" was a financial bust. That view proved to be quite short-sighted.

In a similar vein, when I got out of graduate school in the early '90s, the job market was locked shut, and a few years of temp jobs led me to question my future. An eventual economic boom helped me and my friends land on our feet and do our patriotic duty: spend with abandon.

Today's millennials are poised for the same opportunity: The U.S. economy is so large and resilient that the next robust economic upturn is inevitable -- even if it seems to be taking its sweet time getting here.

So how can you profit from millennial investing? We can already draw some early reads on their changing consumption patterns.

Housing
In contrast to their parents, millennials appear to want to maintain a smaller environmental footprint, which likely means smaller houses than the ones people my age grew up in. These days, it's a lot harder to find families with four or five kids, as was often the norm back in the '70s. (I'm the youngest of four, and between my three adult siblings and I have a total of five kids. Average kids per household: 1.25).

Indeed, the National Association of Homebuilders anticipates rising demand for downsized homes in coming years.

Right now, homebuilders are benefiting from the sale of larger, more expensive homes, largely because baby boomers are still flush and millennials are still struggling. That's playing right into the hand of high-end homebuilders such as Toll Brothers (NYSE: TOL).

But look for the tide to turn. As millennials approach their 30s, they are likely to focus on smaller, less expensive homes. As an investor, you should focus on homebuilders that cater to this trend. For example, D.R. Horton (NYSE: DHI) focuses on first-time buyers in their 20s and 30s. The company's average price for a new home is around $230,000, compared with around $300,000 for the rest of the industry.

PulteGroup's (NYSE: PHM) 2009 acquisition of homebuilder Centex provided entry to the starter-home market. Shares of Pulte have slid 35% since mid-May on concerns that rising mortgage rates may impede housing sales in the near term, but investors with a long-term view of demographic changes should see that as a fresh opening.

Cars
There's bad news ahead for automakers: Millennials increasingly prefer to live without cars, with many of them choosing to live in urban environments. Of course, many of them will move out to the suburbs once they start families, but studies show that millennials simply don't have a fascination with cars that their parents had. As a result, look for fewer cars per household, and look for those cars to last a very long time, as the trade-up trend starts to fade. For investors, keep an eye on the automakers that appear to be making clear headway with millennials.

Ford (NYSE: F), for example, has aggressively sought to brand itself as an automaker with edgy styling, and a high level of digital content in its interior. GM (NYSE: GM), meanwhile, especially in its Cadillac and Buick divisions, is still working to shed a perception among millenials as a car their parents would prefer.

The E-tail Onslaught
In an extension of a trend that has been underway for more than a decade, look for more retail sales to take place online and less in brick-and-mortar stores. Millennials are becoming more deeply immersed in online spheres, as evidenced by the fact that social media companies such as Facebook (Nasdaq: FB) and LinkedIn (NYSE: LNKD) continue to grow at a rapid pace.

"For the echo boom generation, 'showrooming' -- looking at products on the shop floor, but turning to the Internet to make the purchase at the lowest price -- is a way of life. It is this demographic that already accounts for a significant proportion of retail sales," according to the Urban Land Institute.

As an investor, you should be spending more time researching which online retailers are building a strong and loyal base of customers. Conversely, you should tread lightly with any legacy bricks-and-mortar retailer that has failed to embrace the world of digital shopping.

Amazon.com (Nasdaq: AMZN) is clearly the biggest beneficiary of the shift to e-tailing. but I highlighted a few other e-tailing firms recently.

Along with "pure play" e-tailers such as Blue Nile (Nasdaq: NILE) and Expedia (Nasdaq: EXPE), though many traditional retailers such as Best Buy (Nasdaq: BBY) are building huge online followings as well.

Ethnicity
The millennials are much more ethnically diverse than their parents, which is already affecting consumption trends. For example, Spanish-language media and entertainment has grown at a fast pace over the past decade, and even as many Hispanic Americans eventually transition into English-speaking households, they are still likely to be avid consumers of Hispanic food and culture.

With a $12.5 billion market value, Chipotle Mexican Grill (NYSE: CMG) has surely been noticed by investors that understand the fast-growing interest in Latin American food. But with a market value of less than $600 million, lesser-known Chuy's (Nasdaq: CHUY) may be the better option in the dining scene.

The Next Boom
Perhaps the single greatest spending trend in this group will be in preparation for the next generation.

In a survey conducted by the Pew Research Center, only 15% of milllennials expressed a desire to have a high-paying career, while 52% of then expressed the desire to be good parents as their No. 1 goal.

This suggests this this 82 million-strong demographic will be buying a lot of baby formula and diapers, and consuming a lot of educational programming on TV and online.

Then again, I recall being flat broke in my mid-20s, and though it didn't make me want to be rich, I eventually cared a lot more about earning a good living and owning my own home than I did when I was in my early 20s. So maybe these millennials will become as spendthrift as their parents, even if they now profess otherwise.

Risks to Consider: The millennial boom will take a number of years to reach full fruition, so this isn't a strategy for short-term trades. Instead, it's wise to start building a research list of potential beneficiaries from this theme -- and be prepared to pounce on them if they temporarily slump in value.

Action To Take--> The millenials will only slowly become a powerful economic demographic. That makes this a good time to study their consumption patterns and start identifying the companies that stand to most benefit from their coming wave of spending. The decade ahead should show signs of rising spending from this group, and by 2025, they will be approaching middle age, which often represents the peak in discretionary spending for most people.

P.S. -- If you're interested in profitable predictions, you should check out our latest report, "The 11 Most Shocking Investment Predictions For 2014." Our previous predictions have given investors 89%... 92%... 293%... and even 310% gains in a year. To hear our latest, including how a little-known soda company will rival Coke and Pepsi, click here. 

David Sterman does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.