I'm Buying This Stock Now

Sometimes, when the stars align perfectly, you feel like you can grab shares of a monster stock that's largely under-appreciated. After evaluating my options, I think I've found that stock in Lumber Liquidators (NYSE: LL  ) , a small-cap, hardwood flooring specialist in the ugliest of all industries right now: housing.

A housing recovery is just around the corner
When it comes to taking the pulse of the housing industry, I don't think there's a much better source than our own Morgan Housel. Morgan has spent much of the last two weeks showing us that although prices of housing may still be suffering, new housing starts -- which account for a lot of the jobs that were lost over the last three years -- are bound to pick up before long.

In general, it makes sense for the United States to be producing roughly the same number of houses as there are families being formed and ready to move into them. Leading up to the crash, that certainly wasn't the case: Too many people were buying house after house on credit, while others were building homes far above their means. We all, of course, know what that led to.

But since then, things have changed. A combination of new families (households) forming, anemic new-housing starts, and even some foreclosed homes being bulldozed have all led to a rather quick reversal. To quote Morgan directly: "During the bubble we were building about 2 million homes a year while adding 1.5 million new households per year. Today we're building 500,000 homes a year while adding around 1 million new households per year."

It doesn't take a math whiz to see that sooner rather than later, we're going to have a shortage. If you'd like a visual representation, check out the U.S. housing starts versus the U.S. population.

Sources: Federal Reserve and Morgan Housel.

Whereas the long-term average sits around 0.006, we're now producing only a third as many houses right now relative to our population. Some might even argue this could lead to a tripling in new-housing starts.

Why Lumber Liquidators?
Of course, building a case for new-housing starts isn't the same thing as saying that Lumber Liquidators will profit more than the others from this trend. The company has some well-financed behemoths to compete with, including Home Depot (NYSE: HD  ) and Lowe's (NYSE: LOW  ) .

But by focusing solely on providing quality hardwood flooring at the cheapest possible price, Lumber Liquidators is using its size to its advantage. Home Depot and Lowe's are forced, by design, to set up shop in high-traffic areas with stores that are several thousand square feet and staffed by hundreds of employees.

Lumber Liquidators heads in the other direction entirely, opening up their stores in low-rent areas, with bare-bones stores (how much do you really need to show off hardwood flooring?) being run by just one store manager and two or three sales associates.

If this were a normal consumer purchase, I'd say such a bare-bones approach would hurt, rather than help, the company's brand. But the reality is this: When consumers are building or remodeling a home, they understand that it's worth the effort to shop around for the best price. And there's no doubting that Lumber Liquidators offers the best price.

If you don't believe me, here's what a little homework turned up. Specifically, I went looking for the price per square foot of solid red oak flooring at 3/4 inch by 4 inches (or the closest I could find) to cover 2,000 square feet.

Company
Price per Square Foot
Total Cost
Lowe's  $5.77  $11,540
Home Depot  $5.48  $10,960
Lumber Liquidators  $4.09  $8,180

Source: Company websites.

With savings like that, I think customers will go out of their way to find their local Lumber Liquidators.

As they become more aware of the value proposition available at LL, I also think the company will be able to start consolidating the highly fragmented hardwood flooring market, which is dominated largely by local mom-and-pop stores.

And because the average new store is profitable in just three months, the company can fund its rapid growth without needing to worry too much about debt. That's the kind of growth story I want to be a part of.

Join me!
I already own shares of Lumber Liquidators, and I'll be buying more for my Roth IRA when trading rules allow. I'm also reiterating my CAPScall in favor of LL on my all-star profile.

If, for some reason, you still aren't buying into the housing recovery, I suggest you take a look at another burgeoning industry -- mobile phones. We here at The Motley Fool have created a special free report: "3 Hidden Winners of the iPad, iPhone, and Android Revolution." Inside, you'll get the names of three off-the-radar companies that are benefiting from our growing reliance on smartphones. You can get a copy of the report today, absolutely free.

Fool contributor Brian Stoffel owns shares of Lumber Liquidators. You can follow him on Twitter at @TMFStoffel.

The Motley Fool owns shares of Lumber Liquidators Holdings. Motley Fool newsletter services have recommended buying shares of Lowe's Companies, Lumber Liquidators Holdings, and Home Depot, as well as writing covered calls in Lowe's Companies. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (9) | Recommend This Article (17)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 03, 2012, at 4:09 PM, Hawmps wrote:

    "Lumber Liquidators heads in the other direction entirely, opening up their stores in low-rent areas, with bare-bones stores (how much do you really need to show off hardwood flooring?) being run by just one store manager and two or three sales associates."

    Excellent observation. From what I've seen they are always moving into a 20 to 30 year old small light industrial/flex warehouse type of space that's just off the main drag and has been historically difficult to lease. They get a good deal on rent, they do their interior build-out with their own products, customers (DIY home remodeler or contractor) will go out of their way to find them, and it is that much easier for them to maintain their margins because they have reduced their overhead right out of the gate. They are also very customer friendly, like if you end up a couple feet short on a project, they'll open up a box and and let you walk out the door with what you need and not make you buy the whole box. Customers remember the little things like that too.

  • Report this Comment On February 03, 2012, at 4:25 PM, TMFCheesehead wrote:

    @Hawmps-

    Glad to hear you concur!

    Brian Stoffel

  • Report this Comment On February 03, 2012, at 11:39 PM, BlazerMania wrote:

    Does the 500,000 new homes a year number include only single family residences? I'm curious as to how the multifamily (apartment buildings) market factors into that statistic. New apartment buildings and condo renovations into residential rental have been going up like crazy the last couple of years. If those aren't being included in the 500,000 number, than the predicted recovery for new home construction may be further off than it would appear.

  • Report this Comment On February 04, 2012, at 9:20 AM, TMFCheesehead wrote:

    @Blazer-

    I do believe those numbers are included, but since I'm stealing those facts from TMFHousel, I'll have to do some more digging.

    Brian Stoffel

  • Report this Comment On February 04, 2012, at 12:28 PM, BlazerMania wrote:

    Wow, assuming it does, that's pretty amazing. This is a great pick!

  • Report this Comment On February 04, 2012, at 9:39 PM, pmart wrote:

    Hey Brian,

    I've got my eye on this one too. I haven't bitten yet because back in my construction days, I frequently saw customers choose the more expensive mom and pop stores over LL. Actually, I'm not sure the company ever won. Still, it's hard to deny the growth potential.

    Also, I'm not sure new housing starts is the right metric for your thesis -- unless you're using it as a proxy for the over all real estate market. The bigger builders probably go through wholesalers capable of selling lumber by the forest load. and people moving into brand spanking new homes rarely swap out the flooring. However an increase in existing home sales or the residential remodeling index could be a good sign.

    -Patrick

  • Report this Comment On February 05, 2012, at 12:21 AM, TMFCheesehead wrote:

    Patrick-

    Definitely using it as a proxy. Though I do know a few friends who've recently built homes (stand alone, not part of a larger built-at-once community) who've used LL for their homes.

    Brian

  • Report this Comment On February 05, 2012, at 5:28 PM, hanover67 wrote:

    I started buying LL in October 2010 when I used their product to re-floor my kitchen and read a Motley Fool recommendation. I did my research, liked the company's expansion plans, and started accumulating the stock.

    What I didn't anticipate was their SAP fiasco or the rocky road the market would then take for a year or so. But, I averaged down and my overall cost is $21.51 per share, about where we are now.

    I still believe in the business plan to open more stores, be the low cost vendor, and keep their eye on the ball. I buy companies for the 3 to 5-year timeframe, and I think LL will be in the right place at the right time when housing (in general) improves, which is a function of employment and confidence than anything else. You are not going to re-floor your kitchen if you don't have or think you will lose your job.

  • Report this Comment On February 06, 2012, at 1:22 PM, loriyacht wrote:

    I own IRL too. I bought it after purchasing some flooring for my house. The sales people (who are few) seem to work together well. I asked the manager about it, and he told me that they each get a share of the revenue each month - and it is the same for them all. Results in great service - even when I had to make a return. I liked the low overhead set-up - people were in there, spending thousands of dollars, in a warehouse area, with only 4 employees!

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