May 24, 2022

aanvang

Masters of home interior

Lowes vs Home Depot – Which Home Improvement Stock is a Better Buy?

4 min read

One of the most important things influencing any stock in the short-term is the market’s mood. Even hard data is subject to interpretation, and traders react based on what they choose to focus on rather than taking a holistic view of any news. That flexible attitude to even hard facts extends as far as the reaction to the most fundamental of corporate data: earnings reports. Just take a look at what happened to stock in the two home improvement giants, Home Depot (HD) and Lowe’s (LOW) as they released their earnings yesterday and this morning, respectively.

Home Depot reported beats on both the top and bottom line, with EPS of $3.21 versus an expected $3.18, up from $2.65 a year ago. They guided for slow but positive growth this year, with numbers that were basically in line with analysts’ expectations. Lowe’s earnings looked eerily similar, with EPS showing a small beat of $1.78 versus estimates of $1.71, also on slightly higher than forecast sales, while raising their full-year guidance. That similarity really shouldn’t come as a surprise, given that both companies are in the same business. Home Depot is traditionally more dependent on professional contractors than their rival, but they are basically competing in the same market.

And yet, with similar results and the same prospects, the two stocks reacted to earnings completely differently. HD dropped dramatically after their release yesterday, to the point where at one stage, the stock was down 9.95% from the previous trading day’s close, while LOW is up around 2.25% in early premarket trading after their release.

Those looking for a company specific reason for HD’s collapse yesterday generally settled on the disappointing margins last quarter. It is true that profitability was down, but that was clearly explained as being the result of investments in the supply chain. Given what we have all seen over the last six months or so, that would seem to be wise future-proofing that will also improve short-term margins, though, so is it really a reason for the stock to drop nearly 10%?

No. of course it isn’t. The reason that happened was because yesterday, traders and investors were in a bearish mood after Russia’s invasion of Eastern Ukraine whereas this morning, the focus is on the fact that that situation may possibly make the Fed less hawkish and index futures are, as I write this, indicating a higher opening. I get that, but does anyone actually think that, as possibly tragic as the situation in Ukraine is, it will have any noticeable negative impact on the business of Home Depot? No.

That business going forward looks pretty good, too. The reasons for the relatively strong Q1 for both companies, a lack of new housing forcing a second remodeling boom to follow on the one driven by the pandemic, are still in place. Mortgage data this morning showed the number of new loans at a two-year low, but other evidence, such as still rising house prices, points to that being about a shortage of sellers rather than weak demand. So, if people can’t move, they will improve. That is good news for both HD and LOW.

The fact is that when HD released their earnings yesterday, traders were looking for bad news. They therefore focused on the lower-than-expected margins, even though they were the result of needed and probably smart investments. Then, once the selling started, it became a self-fueling fire. Everyone was looking for something to sell and HD was down big after earnings, so became a “logical” target. The actual beat of expectations, sales growth, and decent guidance all got ignored. When LOW reported this morning, on the other hand, the mood was more positive, and traders reacted only to the top- and bottom-line beats as they bought the stock.

So, you have the stocks of two companies in the same business, with essentially the same prospects, both of whom reported decent earnings within 24 hours of each other. One is down 8% or so, while the other is up a couple of percentage points. Some may be tempted in that situation to follow the momentum and run with Lowe’s but by far the better value is to be had from HD, which was really a victim of circumstance more than anything and can be expected to recover lost ground before too long.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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