Want to double your money?
Home-improvement retailer Floor & Decor Holdings (FND 2.49%), real estate technology company Redfin (RDFN +0.00%), and luxury-furniture specialist RH (RH 1.06%) have all beaten the market since they went public. And looking through stocks that are already winning is a good way to find tomorrow's winners.
These three companies have a track record of getting it done. What's more, each has lofty business goals going forward. They've set the bar so high for themselves that achieving even a fraction of their targets could put these three companies in a position to double their shareholders' investments.
Image source: Getty Images.
1. Floor & Decor Holdings: Aiming for 400 locations
Floor & Decor opened 20 new locations in 2019, good for 20% year-over-year unit growth. Expect that rapid-growth pace to continue for a while. It operates only 123 stores currently but plans to reach 400 locations in the next 12 years.
The company has reopened all of its stores from the coronavirus-mandated closures it was forced to impose. While other retailers are being disrupted by e-commerce, don't expect that to happen to this one. About 60% of sales are made to homeowners -- consumers who likely want to see their flooring options in person before purchasing. And its products are heavy and bulky, making them less than ideal to be shipped via package-delivery services.
Brick-and-mortar locations are needed in the flooring business, and some prime locations may be opening for Floor & Decor. Recently at the William Blair Growth Stock Conference, Floor & Decor CFO Trevor Lang said it is possible commercial real estate will get cheaper and strategic locations less competitive as a result of several retail businesses permanently shutting down. The cause is less than ideal, but it could give a powerful advantage to F&D as it acquires ideal spaces on the cheap.
Floor & Decor is solidly profitable even while it's spending significantly on growth. And it has grown comparable-store sales every year since 2014 -- the first year it provided data. Profitability coupled with comp-sales growth is a winning formula when expanding a business, which is why I believe this stock can double your money over the next few years.
Image source: Redfin.
2. Redfin: A $100 billion market?
Think about all the expenses inherent in a real estate transaction -- the agent's commission to sell, title insurance, mortgage origination fee, the other agent's commission to buy, taxes, and more. It's a lot, it's complicated, and it's expensive. There's good news, though: With the exception of taxes, Redfin wants to handle everything in the house-buying process, while using technology to deliver a streamlined experience at lower prices.
Redfin estimates that U.S. real estate commissions added up to $82 billion in 2019. Title insurance is a $15 billion annual industry, according to National Mortgage News. Mortgage origination fees typically cost between 0.5% and 1% of the value of the loan. In 2019 in the U.S., home purchases hit $1.3 trillion, according to Statista. That puts the value of the mortgage origination market somewhere between $6.5 billion and $13 billion.
Add it up and Redfin has a greater than $100 billion market opportunity just from these services. For perspective, it collected just $780 million in revenue in 2019.
The average homeownership tenure in the U.S. -- i.e., how long a buyer lives in a house -- is currently over eight years, according to ATTOM Data Solutions. Given that Redfin only launched in a single market in 2006, the degree to which its service is being adopted -- and the customer loyalty it might be garnering -- isn't immediately apparent but could become so more in the next few years.
It's already clear that the company is picking up momentum. In 2019, Redfin had 44% growth in repeat customers, a strong indication that its customers were satisfied. Over time, this could be a huge tailwind as previous Redfin users begin to go house shopping again. And as the company brings its mortgage and title services to new markets, it can monetize customers better by offering a one-stop service.
Image source: RH.
3. RH: Looking for $20 billion in revenue
It's hard to think of a company more contrarian than RH. At a time when many other popular players in the home furnishings niche are pushing inexpensive products via e-commerce, the company formerly known as Restoration Hardware is focusing on selling luxury furniture from gaudy showrooms. But being contrarian has its perks -- there's really not another big-name company trying to do what RH is doing.
RH has been successful; net income more than doubled from 2015 through 2019. Management is adept at finding ways to grow the business while saving money. For example, the company has shifted to a sale/leaseback expansion model. It develops a location, sells the property for cash, and leases the space back under a long-term contract. This allows RH to expand cheaply and fixes ongoing operational expenses.
Because the competition is fragmented, RH believes it can expand into every major market in the U.S. to generate between $5 billion and $6 billion annually. For perspective, net revenue was $2.6 billion in 2019. It also believes it can take its showrooms to major markets internationally and become a $20 billion brand.
Why stop there though? In reality, RH has an even grander vision. Selling furniture is just a retail business. But it aspires to expand into foodservice, hotels, experiences, and even turnkey luxury real estate. As CEO Gary Friedman said in his first-quarter letter to shareholders, "The entire ecosystem will come to life digitally as we transform our website into The World of RH, a portal presenting our Products, Places, Services, and Spaces."
Friedman estimates the market opportunity for the ecosystem at $70 billion to $100 billion. Given RH's current market capitalization of just $5 billion, and the company's track record of profitable growth, I think it's fair to call this stock a buy.
