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The millennial generation, which currently comprises people who are 18 to 34 years old, has officially overtaken the baby boomers (51-69 years old) as the largest living generation in the United States.
What’s more is that the millennial generation will eventually be bigger than the baby boomers ever was. The Pew Research Center says the millennial population will peak at 81.1 million in 2036, which will top the baby boomer peak of 78.8 million in 1999.
Source: Pew Research Center
The question for investors is the best way to play this development. Millennials have been wreaking havoc on the status quo, from the housing market to your breakfast table. However, one area that they’ve been noticeably lagging in is child birthing.
The financial crisis and the following recession coincided with a rise in millennials being college- and career-focused, so the children of the baby boomers are just now starting to have kids of their own.
But the birth rates for millennials appears to be turning around, which should prove to be a key economic driver for certain companies.
Births in the U.S. have been on the rise since 2013. Demographic Intelligence says there were 4 million babies born in 2015, up from the 3.99 million in 2014. As well, the total fertility rate, which measures the number of births an average woman has, hit 1.87 in 2015, compared to 1.86 in 2014.
One of the obvious plays on the rise of millennial child birthing is baby formula. The pure-play stock for this market is Mead Johnson (NYSE: MJN), which is the maker of the Enfa family of baby formula brands.
Yet, there are issues at hand here. As I noted last year, Mead Johnson doesn’t get much of its revenues from the United States. About 70% of its sales come from Asia and Latin America, and with China’s economy remaining unsteady, it might be best to hold off on Mead Johnson.
Thus, I’m looking toward the smaller-cap space to find underrated ideas. Here are the top two ways to play the upcoming millennial boom:
No. 1 Overlooked Millennial Generation Play: Bright Horizons Family Solutions (NYSE: BFAM)
Bright Horizons is a $4 billion market cap child care provider. It also has contracts with employers to provide child care and early education services.
I first started plugging Bright Horizons back in 2014. Shares are up 45% since then, despite a 4% decline over the past year. But it’s still a compelling investment.
Child care isn’t cheap, but that’s actually a tailwind for Bright Horizons. The millennials that are having children are more financially stable than previous generations – thus they have a greater ability to pay for child care. Plus, they have a greater penchant to go back to work, which is another advantage for Bright Horizons.
In particular, the women having children these days are older, more educated and usually married. In the past, it was high-school dropouts and teenage girls having a large number of children.
No. 2 Overlooked Millennial Generation Play: Carter’s (NYSE: CRI)
Carter’s is a $5 billion market cap maker of children’s clothes. Down 5% over the last month, Carter’s shares have been pulled down with the rest of the apparel retailers, following weak quarterly results from the likes of The Gap (NYSE: GPS) and Nordstrom (NYSE: JWN).
However, the key differential is that Carter’s focuses on an entirely different market. It has well-known brands in child apparel – including OshKosh B’Gosh and its namesake Carter’s brand – and it dominates in terms of market share for baby clothes and children’s sleep and play wear.
Even over the last five years, while births were lagging, Carter’s managed to put up double-digit sales growth. As well, its operating margin has been in the double digits for the last four years. Its recent growth initiative has been to launch an e-commerce platform, which has also been growing in the double digits. Lest we forget, Carter’s pays a 1.3% dividend yield.
In the end, this might not be the way you envisioned playing the millennial generation boom, but it’s one of the most underrated angles and has the best potential for outsized returns for investors.
The key is to find broad underrated trends and then find the stocks that can benefit the most. The likes of Carter’s and Bright Horizons will benefit the most from the pent-up growth in the millennial child birthing market.