Playing A Recovery In Housing: 2 Stocks To Buy

 |  Includes: HD, LOW
by: Jayson Derrick

By Jayson Derrick

As was shown in the Q4 GDP release, private residential fixed investment (PRFI) grew by 16% which was the best result since 2004. The PRFI consists of purchases of private residential structures and residential equipment that is owned by landlords and rented to tenants. While the PRFI growth has been strong as of late, as a percentage of GDP it now represents 2.56% which is barely off the Q3 2011 bottom of ~2.2% and well below the 65 year mean of 4.6%. Looking forward, it would be realistic to assume that the PRFI could continue to grow year over year for at least the next 3 years assuming moderate GDP growth and a modest and continuing recovery in the overall economy. A modest sequential GDP growth of 1% (which is on the low end of estimates) combined with a 7.5 bps gain in PRFI as a percentage of GDP can result on consistent PRFI compound annual growth of at least 15% through 2015. Investors that believe the housing recovery is only beginning and as such shares the same sentiment as I do should consider an investment in Home Depot (NYSE:HD) and Lowe's Companies (NYSE:LOW).

Home Depot

I am quite bullish on Home Depot going in to 2013 and beyond. Given a no/low growth store opening cadence, expense leverage on an accelerating comp trend can be quite significant. Separately, the company would continue the share repurchase activity at a more significant pace in 2013 will also be a catalyst for share appreciation. The company was active in 2012 but with debt/EBITDA leverage ratio of 1.7x management has the capacity to take on more debt under its max target of 2x, which would not surprise many if this target is elevated over time.

The company will be releasing quarterly results on February 26 and is expected to earn 64 cents a share, a sizeable increase from 50 cents last year. Home Depot has beaten estimates in three of the last four quarters, and I believe that buying Home Depot prior to their releases will give investors an immediate return.

The company confirmed that they are beginning to fill more than 80,000 seasonal positions in their stores in anticipation of the busiest selling season, which is certainly an indication that the business trends are improving. The 80,000 workers being hired this year is 10,000 higher than what was seen in 2012.


Lowe's remains a very intriguing name for 2013 given their turnaround initiatives, the most popular of which includes an innovative use of Apple's (NASDAQ:AAPL) iPhone. Lowe's has created two custom apps for employees which gives their associates access to key product information and built in credit card scanner for quick payment. An app for customers includes the ability to place orders, read product reviews and also includes free tips and how-to videos.

The company announced better than expected quarterly earnings on February 25 but offered a disappointing full-year outlook. Net earnings and revenues fell in the quarter, however total same store sales and gross margin were both up as both of these metrics gauge a retailer's health. Lowe's will be active over the next two years buying back up to $5 billion worth of shares. Like their 'larger cousin', a share buy back program should accelerate share growth.

I am happy with the fact that the company is active in their desires to expand outside the US borders through new store openings in country like Mexico, plans to open 150 stores in Australia and acquisitions of competitors. In 2012, the company made a bid for RONA, a Quebec based competitor but was forced to withdraw the offer due to Quebec's political issues. Lowe's indicated that they are still active in acquiring a Canadian company: "We continue to make improvements in the operations of [our 32 current stores]. But we need more scale…That's going to come from opening additional big box stores, looking at other [store] formats… and we'll also continue to look at acquisitions as a potential way for expansion."

Lowe's has made changes to their corporate structure with a focus on value improvement and product differentiation to drive long term sales growth and improve shareholder return. That being said, I believe the company has near term concerns on expenses and while the long term outlook is positive, short term I believe investors can find a better entry point.


I am a big fan of the do-it-yourself home improvement companies and truly believe that both Home Depot and Lowe's can grow their earnings as a housing market continues to improve. Home Depot is the largest home improvement retailer and is the clear winner, providing a much higher rate of return than their rival and second largest home improvement chain. That being said, both these companies would be a wise choice considering each have greatly outperformed the S&P 500 (NYSEARCA:SPY) however with Lowe's in the process of revamping their business model and Home Depot carrying momentum, I would personally go with an investment in Home Depot over Lowe's.

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Source: Yahoo Finance

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.