Our writer thinks a long-term trend could boost one sector. That is why he would happily own two FTSE 250 companies that both specialise in it.
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The FTSE 250 index of companies includes a lot of businesses that are still firmly in growth mode. I have been thinking about what potential growth areas I want to target in my portfolio.
I have identified one I think might see sales increasing for many years or even decades to come — and two shares I could own in my portfolio to get exposure to that long-term opportunity.
The trend in question is the growth of self-storage. This has long been a big business in the US. Historically people there often moved around to follow work opportunities, while storing some of their belongings temporarily.
The drivers for the growth in the UK are not quite the same, although labour mobility does play a role. I also think a tight housing market, which means space is at a premium, will lead more and more people to store belongings away from home. On top of that, a move to mixed working could mean that some businesses downsize their premises – but still need somewhere to store merchandise.
All of that bodes well for demand in the self-storage industry.
From a commercial perspective, I think the industry can be rewarding for investors.
It is a pretty simple model – a company can hire or buy a large space then sublet little bits of it at a higher rate. As many customers only need to access their unit occasionally, if at all, self-storage buildings do not need to be in expensive, prime locations.
As the saying “out of sight, out of mind” suggests, many people put things into storage on a short-term basis and then no longer think about them as much as when they were clogging up the house. That can lead to customers leaving items in storage for years at a time, paying rent all the while.
In fact, one of the few things I do not like about the model is precisely how straightforward it is. That means that barriers to entry are fairly low, beyond the initial outlay of buying or renting a building. That could hurt profitability.
That is one reason I own one FTSE 250 self-storage company in my portfolio — Safestore — and would consider adding its rival, Big Yellow.
Both have invested in building a distinctive brand that can drive customer preference for them over rivals. That can create loyalty and help them maintain pricing power. If the market becomes more competitive and rivals cut pricing, that might help those two firms maintain their profit margins. Then again, it might not — and they also face other risks, such as rising property prices that make it costlier for them to operate.
But why would I consider buying both of these FTSE 250 firms in the same line of business rather than just one?
I reckon both are well-run and benefit from strong brands. They have large networks of sites that can also help differentiate them from smaller local companies. Both also pay dividends.
I invest for the long term. I see this pair of businesses as potential long-term winners from what I expect to be continued growth in demand for self-storage facilities. For that reason, I would be happy to own both shares in my portfolio.
Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.
C Ruane has positions in Safestore Holdings. The Motley Fool UK has recommended Safestore Holdings. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
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