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Might Be Time To Buy LOW

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Lowe’s (LOW - Free Report) fell over 11% following their Q1 earnings release this morning and continues to fall. LOW showed weaker than expected EPS results and management cut its full-year earnings guidance by more than 8%. The firm missed its EPS estimates by 8.3%, with very little growth from the prior year. Revenues narrowly beat estimates and showed just over 2% growth from the same quarter last year.

Marvin Ellison took the helm as Lowe’s president and CEO in July of last year and has committed to focus on consumer and retail fundamentals to drive growth. Ellison is concentrated on improving customer service, inventory control, and other efficiencies within the firm. The stock has been all over the place since the torch was passed last year, and with LOW’s gap down this morning, the stock is performing below the S&P 500’s 52-week performance. Lowe’s went from being up almost 20% for the last 12 month yesterday to being up only 5.6% today.

Ellison’s attempted improvements have taken a hit on Lowe’s margins. Gross margins went from 33.11% for Q1 last year, down to 31.46% in this most recent quarter. This drop in gross margin is a concern for investors moving forward because it could be an indication of systemic issues with Ellison’s new strategy.

I discussed how homebuilding & improvement retailers were correlated with the housing market in my article yesterday, Home Depot, Lowe’s, and Housing Development: What to Expect. I talked about some of the pressures that Home Depot (HD - Free Report) and Lowes were facing for this past quarter and the rest of the year. Constraints include labor and land shortages for home builders as well as a wetter than expected spring. These caused an oversupply of lumber (meaning lower prices) and potentially lower demand for other construction products as well.

Take Away

Companies like Lowe’s and Home Depot have betas above 1 because of their exposure to the volatile housing market, making them sensitive to economic pressures. If you are a contrarian investor and believe in both Ellison as a CEO and strong economic performance throughout the year, this may be a perfect time to buy LOW at a lower valuation. The market could be overselling LOW on this negative news.


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