Is it Time to Consider Investing in Home Improvement Stocks?
As the US economy limps along whistling Dixie, with the US consumer deciding it’s wiser to save than spend, is it time to think contrarian and look at home improvement retailers as a longer term investment? Consumer spending says no, but in fact this sector is doing quite well right now.
Yes the recent housing bubble is behind us (the last one anyway) and those fortunate enough to have weathered the storm are still quite worried about the next one they see on the horizon. But recent earnings from Home Depot and Lowes tell us that although consumers’ wallets have been locked up in a safe lately, they are spending on home improvement.
The days of “sassing up” a cheap property for a flip are behind us and folks are now spending their hard earned ducats on the house they plan on living in for the duration of their 4% mortgage. The volume of private individuals flipping homes is way down from the peak 10 years ago.
Considering the fact that it has become damn near impossible for mom-and-pop property investors to secure loans for investment properties (for the most part, only the very wealthy and REITS have been successful with this lately), the key to real estate success has been to improve the value of your existing home, hope to sell it at a profit and move… rinse and repeat.
Although you’ve probably heard some ads on talk radio proclaiming the wonders of Mr. X’s real estate flip strategy, the truth of the matter is banks are wary to lend capital to normal folks like us for these types of investments. In fact, if you listen closely, many of these flip gurus aren’t even selling you a book on their strategy; they’re actually looking for you to put your capital in with them (as private REITS) as they’re having trouble getting loans as well. This leaves the real estate investor from 2004 in a bind (if she’s still afloat), which in is not good news for the big box improvement stores. But…
Consumers are willing to purchase more and higher quality goods for their own homes than for those they once flipped. So higher price-point products are now going into homes and earnings for both (HD) and (LOW) have grown substantially over the same quarter last year. A great deal of the earnings growth we are seeing is coming from actual home improvement, and not nearly as much from jazzing up flippers that we’ve seen in the past bubble.
So can this trend of home improvement spending continue for the long term or will it soon fade? Well the answer to that question lies completely in the employment rate, the FED and the next presidential election.
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Basically, until the employment situation turns “real” and high paying full-time jobs are created, we can expect this trend to slow. Of course, if the FED does raise rates here soon, we can also expect a slowdown as home sales will certainly stall. The election? Who the heck knows what’s going to happen there, but a more friendly tax policy could reignite job creation and capital investment making a bullish case for these stocks.
If you’re a true believer that the economy has turned around and these big box home improvement stores are a good buy, keep in mind that both Home Depot (HD) and Lowe’s (LOW) are trading near their 52 week highs and both are trading near their highest PE ratio in years. So you must believe their earnings will continue to be very strong for quarters to come. Even in this dragging economy, these stocks are not cheap.
This from our friends at Forbes: A housing recovery may be keeping home improvement retailers like The Home Depot insulated from the problems plaguing other retail stocks.
The Home Depot reported third quarter net income as $1.7 billion, or $1.35 per share, up a whopping 17.4 percent, from a year ago. Total sales were up 6.4% to $21.8 billion year-over-year. These earnings were in line with analyst estimates. Home Depot shares ticked up 1.6% Tuesday afternoon.
Have a great weekend.
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