Investors seeking to profit from the growing clout of millennials need to bet on a new breed of businesses catering to them.
The millennial generation refers to the group born roughly between 1980 and 2000. Unlike their baby-boomer parents, they are digital natives growing up with different lifestyles. They use sharing-economy services, such as Uber taxis and Airbnb vacation rentals. They take selfies with smartphones, play video games and shop online. And they tend to eat healthier, and value personal experiences – be it trying new foods or taking exotic holidays.
Given the unique traits of these consumers, we asked three portfolio managers for their top picks among stocks that should get a tailwind from this cohort.
Rick Ummat, portfolio manager, Jemekk Capital Management Inc., Toronto
The pick: Grubhub Inc. (GRUB-NYSE)
52-week range: US$41.35 to US$113.61 a share
Millennials are the fastest-growing group of users for this U.S. leader in restaurant-food delivery services, Mr. Ummat says. Chicago-based Grubhub offers online and mobile ordering for about 80,000 restaurants, and they include ethnic eateries appealing to this cohort’s desire to “try different things,” he adds. Yum Brands Inc. also recently invested US$200-million for a 3-per-cent stake in Grubhub, which now delivers for its KFC and Taco Bell outlets.
Grubhub, whose sales have been helped by acquisitions, has 4 to 5 per cent of the market, so “there is still a lot of runway,” he suggests. It is three times bigger than DoorDash, which is followed by Uber Eats, Postmates and Amazon Restaurants, he says. Competition is a risk, but Grubhub could be a takeover target too, he notes. Its stock trades at nine times sales so “you are paying for a lot of growth,” he adds.
The pick: Ulta Beauty Inc. (ULTA-Nasdaq)
52-week range: US$187.96 to US$310.19 a share
The U.S.-based beauty-store chain benefits from the millennials wanting to look their best for their selfies posted on social media, says Mr. Ummat. Ulta Beauty stores don’t just sell products, but also offer “more of an experience,” he says. “You can [for instance] get your hair and nails done. There are professionals teaching how to put on makeup.”
While retailers are closing stores as more consumers shop online, Ulta Beauty plans to add 100 U.S. outlets this year to its current store base of 1,074, he says. It gets 10 per cent of sales from e-commerce, but customers still prefer the in-store experience helped by its popular loyalty program, he adds.
Its biggest rival is French-based cosmetics chain Sephora. Ulta Beauty’s stock trades at just over 20 times forward earnings, but that is not expensive given that its earnings growth is in the same range, he adds.
Felix Narhi, chief investment officer and portfolio manager, PenderFund Capital Management Ltd., Vancouver
The pick: Freshii Inc. (FRII-TSX)
52-week range: $5.28 to $13.14 a share
The Toronto-based fresh-food restaurant chain, which targets millennials seeking healthy food at reasonable prices, is an attractive long-term investment, Mr. Narhi says. This fast-growing franchisor has a healthy balance sheet, earns lucrative royalty fees, and benefits from “millennials spending more on eating out than any other generation,” he says. Freshii plans to expand to 730 stores by 2019 from 396 outlets in the last quarter. It has partnered with Air Canada, and recently with Shell Canada Ltd. for its retail stores.
Shares of Freshii trade well below its initial public offering price of $11.50 a share, but that’s because it was too optimistic about its growth strategy, he notes. It’s early days, but Freshii’s chief executive officer Matthew Corrin, also a millennial, “is the kind of driven [company] founder that we tend to favour,” he says. “His record has been pretty impressive.”
The pick: TripAdvisor Inc. (TRIP-Nasdaq)
52-week range: US$29.50 to US$57.94 a share
U.S.-based TripAdvisor, which has moved into the direct-booking business from its origins as a travel-review website, should benefit from millennials doing research online for vacations, Mr. Narhi says. “Millennials are doing way more travel than any previous generation.”
TripAdvisor earns revenue from referral fees to travel agencies, such as Booking Holdings Inc., which owns the Priceline brand, and Expedia Group Inc. Because these two players basically have a duopoly in hotel reservations, TripAdvisor’s growth potential comes from booking attractions and restaurants, he adds. “Last quarter, revenue grew by 36 per cent in that segment.”
TripAdvisor shares have suffered on competition concerns, but “we see it as an opportunity” because it is the largest travel site on the planet, and could also be a potential takeover target too, he says.
Greg Taylor, portfolio manager, Purpose Investments Inc., Toronto
The pick: Activision Blizzard Inc. (ATWI-Nasdaq)
The 52-week range: US$55.41 to US$79.63 a share
The U.S.-based video-game maker is gaining traction as many millennials are “choosing gaming over going to the movie theatre,” says Mr. Taylor. Activision, which is known for franchises such as Call of Duty and World of Warcraft, also makes money from new versions of its games that come out annually.
Its competitors include Epic Games Inc., whose Fortnite Battle Royale survival shooter game has become a huge hit recently. But there is room for all players to co-exist, while the trend toward eSports, or video-game tournaments, bodes well for the industry, he suggests.
A risk to a gaming stock is the potential failure of a franchise so “you want to own a company that is bigger and more diversified,” he says. While the valuation for Activision’s shares is not cheap, its revenues are “growing fast at well over 10 per cent a year,” he notes.
The pick: Shopify Inc. (SHOP-TSX)
52-week range: $108.08 to $214.50 a share
Shopify, which provides the back-office administration for entrepreneurs to build an e-commerce business, is a way to play the online-shopping space, says Mr. Taylor. It’s a trend fuelled by millennials who are “comfortable with buying everything online,” he adds.
The Ottawa-based company, which targets small- to medium-sized businesses, provides the website, inventory management and other services. “It has a good recurring revenue business, and is cash-flow-positive now,” he notes.
Shares of Shopify are not cheap on a price-to-sales basis, but they deserve a premium because the company “has a very strong management team and good growth prospects,” he suggests. “The market it is attacking is massive. They still have much do in North America. When they decide to go abroad and get focused on Asia and Europe, that is when you could really see them take off.”