Yahoo Finance Why Lowe's and Home Depot Stock Is Soaring
The conventional wisdom for sprucing up, repairing and building a home goes like this: When you need the right materials, stock up at a home improvement store.
But the latest sales figures on existing and new home sales introduce a new investment corollary: When you need the right investment returns, buy up the stock of a home improvement store.
That fact of financial life is backed up by formidable gains posted by two chains over the last year. Lowe's Home Improvement (LOW) has climbed the ladder 41 percent despite a 7 percent pullback in May, when it was punished by Wall Street for missing analysts' expectations for earnings (although it did report a more-than-respectable 15 percent increase in revenue from the previous year).
Home Depot (HD) also boasts plenty of curb appeal; it's up 40 percent in the last year.
Compare this to a close cousin -- the farm equipment sector, for example -- and it's no contest. John Deere (DE) has inched up at a rate that far more follows the Standard & Poor's 500 index. It's gained a modest 7 percent from July 2014.
What's behind the almost identical percentage run-ups for both home improvement chains? To begin with, the housing market has finally left its Great Recession funk far behind. Last week, the National Association of Realtors reported that existing home sales for June hit an eight-year high (5.5 million) even as median home prices spiked at $236,400. That's a record high, surpassing the July 2006 peak of $230,400.
"This wave of demand is being fueled by a year-plus of steady job growth and an improving economy," says Lawrence Yun, the NAR's chief economist. "That's giving more households the financial wherewithal and incentive to buy."
And as existing home sales continue at a feverish pace, buyers and sellers doing what they can to get their domiciles in tip-top shape. Meanwhile, the NAR statistics come just days after the U.S. Census Bureau reported that new residential building permits in June hit a seasonally adjusted annual rate of 1.34 million units. That's 23 percent better than the June 2014 estimate of 1.03 million.
Yet for all the statistical exactitude, what's lesser known is how other home improvement chains are faring. The nation's No. 3 home improvement retailer, Menards, is privately held; about 90 percent of the company belongs to founder John Menard Jr., a crusty patriarch who makes his employees -- even those in the executive suite -- clock into work. His chain's omnipresent TV and radio jingle, set to corny banjo music, is "Save Big Money at Menards" -- and he's also made big money, to the tune of $9 billion and No. 59 on the Forbes 400 list of wealthiest Americans.
It's entirely possible with the booming housing numbers that Home Depot and Lowe's will muscle into the Midwestern turf of Menards. Meanwhile, Home Depot has just rolled out a cutting-edge mobile technology, FIRST Phone, that is helping associates speed up checkouts, locate inventory for customers -- and likely boost sales figures in the process. Even without it, Home Depot's numbers are robust. The chain reported $20.9 billion of sales in the first quarter of 2015, a 6.1 percent increase from the previous year.
Lowe's continues along a similar clip, with $673 million in sales in the first quarter, a 7.8 percent increase over the same period a year ago. By all indications, Menards may be keeping pace: its annual revenues grew 17 percent between 2011 and 2013 from $7.1 to $8.3 billion -- and that doesn't take into account this year's housing surge.
Menards, based in Eau Claire, Wisconsin, has nearly 300 stores in 14 states, so it has a long way to go to catch up with Lowe's (1,840 stores) and Home Depot (2,270 stores).
For investors, though, the fate of Menards is only of concern as to how it might affect the stock price for Home Depot and Lowe's. If the chain grows, it's unlikely to cause a dent; if it shrinks, it could signal further dominance by it rivals. But so far, there's no indication of any linkage; rather, more numbers outside the stock market -- and inside the housing market -- signal that there's room at the party for everybody.
Trulia, a San Francisco-based a real estate search and research platform, reports that June's existing home sales increased on an annual basis for the ninth consecutive month. "We are again seeing a lot of competition on the market," says Selma Hepp, Trulia's chief economist. "Selling generally in 34 days, homes are again flying off the shelves, which is much faster than even the month before."
And so long as that continues, home improvement inventory should fly off the shelves as well, which could translate promising investment opportunities.
"The pent-up demand that we've been anticipating started trickling in, and continued strong job numbers are helping," Hepp says, adding: "I do think existing home sales numbers will continue to outperform throughout the rest of this year when compared to other post-bust years."
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