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Home Improvement Stocks Are On The Mend

7 January 2015 in Trading Ideas

The nation’s big two home improvement retailers like what they see in the industry’s future.

Investors appear to be sharing the enthusiasm.

The Home Improvement motif has gained 16.5% in the past three months. During that same time frame, the S&P 500 has increased 3.4%.

Over the past 12 months, the motif has risen 21.9%; the S&P 500 has returned 12.9%.

On its latest quarterly conference call in November, management at Home Depot, which represents a 21.7% weighting in the motif, struck an optimistic tone, saying that it continues to see a recovering home improvement market in the US, according to a Barron’s report.1

Comparable-store sales climbed 5.2% overall, with a 5.8% gain in US locations.

Home Depot’s report prompted Credit Suisse analyst Gary Balter to raise his price target on its stock by $15 to $110, writing that “the total comp would have been higher excluding the negative impact from currency, as the Canadian stores outperformed their US peers on the top-line.” (Home Depot shares closed Monday at $101.)

In fact, according to Barron’s, Canadian comparable sales have been positive every quarter for the past three years — although that pales in comparison to Mexico, which has logged 44 consecutive quarters of positive same-store sales.

For Balter, Home Depot is in “one of the best pockets in retail: There is pent-up demand in housing with first-time homebuyers at a record low and the need for maintenance repairs in an aging US housing stock.” Plus, Balter cited the opportunity for market share gains in the professional market and at the expense of struggling Sears.

Balter noted other positive trends for the company: Total customer transactions in the quarter increased 3.2%, while the average ticket rose 2.3%. Online sales jumped 40%.

Meanwhile, company rival Lowe’s (a 21.5% weighting in the motif) offered its own sunny outlook a day later, providing another spark for the widespread year-end surge in home improvement stocks.

The company’s quarterly sales rose by 5.6%, as Lowe’s said it sees encouraging signs in the housing market, pegging consumer confidence in the market at prerecession highs.2

Lowe’s CEO Robert A. Niblock said the company is cautiously optimistic in its outlook as customers, buoyed by lower fuel prices and interest rates as well as appreciation in home values, are looking to invest in their homes more now than at any point since 2006.

While the new year has brought popular expectations of higher interest rates, the market’s 300-point swoon on Monday, and coincidental fall in the 10-year yield to 2.04%, may complicate that forecast in the near term.

On the other hand, that could mean conditions are still present for home improvement stores to see consumer demand for their products continue to grow.

1Teresa Riva, “Home Depot Can Fix Up Your Portfolio Too,” barrons.com, Nov. 18, 2014.

2Michael Calia, “Lowe’s Bumps Up Outlook, as Financial Results Top Expectations,” wsj.com, Nov. 19, 2014.