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Should We Be Considering Home Improvement Stocks?

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The home improvement duopoly has been thriving amid this stay-at-home initiative. Those home projects we “never had time for” before the quarantine have just made their way to the top of priority lists. With summer coming fast, society stuck at home, and Home Depot (HD - Free Report) and Lowe’s (LOW - Free Report) remaining open, we have run out of excuses. Is it time to invest in these outperforming stocks? If we want in, how do we decide between LOW and HD?

Should We Still Consider Investing In Home Improvement?

The markets have priced in a good portion of the tailwinds that the “vital” home improvement giants have been a benefactor of. Both LOW and HD have outperformed the broader S&P 500, but have they run up too much? Is this boost in home improvement sales only a temporary jump?

Both Home Depot and Lowes reported year-over-year sales growth in Q1, boosted by the peculiar COVID tailwind. These home improvement stores are some of the few big box stores that were deemed essential by state officials, but there is more to these firms’ success narrative than just being essential amid this health crisis.

Both of these businesses have adopted an omnichannel solution that leverages digital technology to meet diverse consumer needs. The scale and digital leverage have allowed Lowe’s and Home Depot to retain their duel leadership of the space. This pandemic will only tighten their market grip on the home improvement segment as their small Main Street competitors are pushed out of business.

These companies unquestionably have more growth ahead of them, but have the markets priced in too much? HD is up 9% for the year and is sitting just off all-time highs, while Lowe’s is down a marginal (2%) for the year. Both have run-up quite a bit since their lows in March, but there may still opportunity.

LOW vs. HD

I am a buyer of Lowe’s over Home Depot. An over 10% spread between share prices has been created since the beginning of 2020, with HD coming out on top. This spread has generated an opportunity to invest in the smaller but higher growth potential, LOW, at a relatively discounted valuation.

Lowe’s big beat on Q1 results reiterated this investment’s relative strength to Home Depot. The company beat both top and bottom-line estimates demonstrating year-over-year growth of 11% and 45%, respectively. These are remarkable results considering the massive blow that the global pandemic has taken on the broader retail space.

Lowe’s and its big brother Home Depot are ostensibly COVID immune. Both stocks return a healthy dividend with LOW yielding 1.9% and HD providing a 2.5% yield, offering hesitant buyers that extra cushion for long-term gains.

The economic outlook is still hazy, and market volatility is likely to persist over the next 6 months as timelines and uncertainties are realized. HD and LOW are subject to the broader market volatility, and considering how much they have run-up may see a short-term blow. As a long-term investor, I am confident that either of these investments will be prosperous in societies “new normal” (but waiting for a pullback may be to your advantage).

Key Takeaway

The home improvement duopoly has stayed buoyant throughout this health crisis because of their essential nature and the extra time that consumers are having around their homes. Their scale and ability to leverage technology will allow both to continue expanding their footprint in the post-pandemic world.

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