Home Is Where the Earning Is

Both Home Depot ($HD) and Lowe’s ($LOW) brought the house down in their second-quarter earnings report. On Aug 18., Home Depot reported earnings of $4.02 (vs $3.71 expected) and revenue growth of 23%. On Aug. 19, Lowe’s reported a strong sales growth of 30%, higher gross margins and earnings of $3.74/share that easily beat analyst expectations of $2.92/share.

TLC: Trading Stocks

Home improvement stocks are largely driven by home sales. Sales of existing homes rose to a record high since 2006 and jumped 24.7% from the previous month of July. So, what’s driving home sales?

• US 30-year mortgage rates reached a low of 2.88% in early August which made home purchases more affordable.
• COVID, which delayed March/April home purchases, is pushing the total number of home purchases up in recent months.

Another factor played a big role in Home Depot and Lowe’s outperformance – both companies were deemed “essential” and were allowed to remain open during the pandemic 

Is this trend going to continue?

Seth Basham, managing director at Wedbush Securities, says “I think we’ll see this trend persist into 2021, the longer COVID persists as a problem. The stock will just continue to skyrocket”.

• Word of caution… An earlier vaccine could be a troubling sign for these home improvement companies.

Sales are clearly driven from COVID and the big question remains: will these sales last post-COVID? Home Depot’s stock is up ~29% and Lowe’s by ~34% in 2020 but don’t get used to these high growth numbers. Both these companies are classified as low-growth and mature companies that are used to seeing ~5-10% annual growth rates.

Buying your dream home stock

The iShares U.S. Home Construction ETF ($ITB) gives exposure to 45 companies in the home building industry. Other riskier and direct ways to invest in the housing industry:

• Online realtor platforms: Zillow ($ZG), Redfin ($RDFN)
• Homebuilders: PulteGroup ($PHM), D.R. Horton ($DHI), KB Home ($KBH)