The Consolation Prize Theory: Why Home Depot Should Profit From the Housing Slowdown

While I am still awaiting my Nobel Prize for the Microwave Oven Rule of Behavior, I am now ready to submit my second soon to be award winning theory called the Consolation Prize Theory.

Conventional wisdom has it that the large decline in luxury home sales will lead to an equally large decline in luxury goods sales. While this may be true for the kind of items that come with a home when you buy it (cabinets, counters, perhaps refrigerators, washing machines and ovens), I think Wall Street is missing the boat on this one.

When a rich person buys a luxury home they are planning to spend perhaps $100K on moving, lawyers, closing costs, decorators etc... They are also planning on taking a 6% hit on the sale of their existing home and probably have to come up with an extra $100K to make a deposit on the new home as well.

So I'm planning on leaving my $1M home that I have $400K of equity in with a $5K per month mortgage to move into a $1.5M home I will have $300K of equity in and a $10K mortgage and the move will cost me about $150K of cash when all is said and done.

Now, the economy didn't hit me but home prices are a little ridiculous and I'm only being offered $900K for my home (I know, contrary logic, but you always think you are overpaying for the home you want and being ripped off on the home you're selling) and the rates are much higher than when I started looking so I decide not to move.

I find myself with $250,000 in the bank that was set aside for "home stuff" and a pretty disappointed wife. I'm a little disappointed myself so I go pick up that HDTV that I was planning on getting for the new living room as a consolation prize which my wife takes as a go-ahead signal to remodel the kitchen and at least 2 bathrooms, replace some carpeting, paint, buy a new couch and order a hot tub (believe me, this is what happens!).

What hurt Home Depot's Expo centers the past few years is the fact that people buying new homes (pretty much everyone was) aren't really looking to remodel. All that is about to change as long as the economy doesn't really collapse.

So let's have some suggestions for companies that will benefit from luxury home remodeling. Be careful to avoid ones like coriander counter makers, as their biggest clients are builders. Think of things that don't come with luxury homes but get added at some point!

Comments

[Saul Sterman:]

Somehow I doubt that Mr. Rich with 100k set aside for remodeling, shops at Home Depot. Ask the good old common folk at HD if they’ve seen Mr. Rich lately!

2006 Aug 20 04:44 PM

[WC Whiner:]

They have, however, seen his contractors.

I like your idea. Still, my prediction is that the housing slowdown is going to take down all its suppliers too hard for you to notice the effect unless you have a long-short approach. If you get a good short rebate, then sure, short homebuilder suppliers against Home Despot. Otherwise, I'd probably just keep fading homebuilder rallies.

(FD: out of that trade again now, but I'll be back in.)

2006 Aug 20 04:52 PM

[Philip Davis:]

Home Depot was just and example and we were talking about their upscale Expo stores, not HD in general although we are long on them for other reasons.

Today we went with RSTO and are still looking for other plays.


I am on the sidelines re. housing in general. This is a pure play for the spending power of the nation's 20 million millionaires.

2006 Aug 21 06:03 PM

[Philip Davis:]

Our first Consolation Prize selection, RSTO, just knocked the cover off the ball, up 17% overnight on "improved margins and demand" coming in with a 1 cent profit against a .05 expected LOSS!!!

We have our second selection, TIF coming on Thursday and WSM is still in play (although not a pure play as it is so dilluted with the pottery barn segment).

2006 Aug 28 06:24 PM

[Saul Sterman:]

Phil-

Nice call!
I still would like a more detailed explanation as to why the market places such a high multiple on this stock. Expected Q3 losses of $0.13-0.19, no shareholder value etc.

www.marketwatch.com/Ne...;siteid=mktw&g...

Is this one of those trading spikes that you like to catch or has management really changed this time and intends on creating shareholder value?

Well done indeed…looking forward for your next call.

2006 Aug 29 03:14 AM

[Philip Davis:]

You need to view RSTO as a start-up.

They will hit their stride next year and p/e should be low 20s with good growth.

Nonetheless, we got out of it on that jump as 17% is way too much money to make in one day. Perhaps either catch it on the next dip or move on...

Hopefuly you caught our flip into HD before the hurricane. We also called TIF based on the Consolation Theory but we exited that one already up 70% ahead of earnings (there's a difference between having a theory and taking too many chances with your profits!).

WSM is a mid-term play as the theory suggests that their awful forecast underestimates the market. However, WSM is dilluted by Pottery Barn - those consumers are really in trouble!

2006 Aug 30 11:58 AM

[Saul Sterman:]

"up 70% ahead of earnings" - you wish! typo, Phil meant to say 7%. Still not bad for 3 days... Phil, did you catch ARNA? I don't think the (upcoming) good news will take it all the way to 17/18. Probably top out 15/16 range. EOM, so I don't have time to write article. Catching it's breath today at 12 but should start moving again tomorrow. (needless to say, I'm long).

2006 Aug 30 04:57 PM

[Philip Davis:]

No 70% is correct! We play options at philstocks.blogspot.co.../ not stocks (way too dull!).

We took the Jan $35s for a buck and got out on the spike yesterday as I didn't trust it into earnings.

I hardly ever play straight stocks but TINY went well as did RSTO but if you follow our picks you will be bored with 20% gains too!

2006 Aug 30 06:34 PM

[Saul Sterman:]

Phil- a thousand apologies. I constantly confuse you with David Philips from 10Q. Right, your Phil Davis the SA options Guru. Just tied a little string around my pinky to remember!

So you mean to say that if I were to play options my portfolio for 2006 would be up 582% instead of 58.2%! (As of today I’m 60% cash.) Honestly, I’m the type of guy that would rather be bored than rely on pills to get some shut eye. But that’s me.

Just out of curiosity, when all is said and done taking into account all the kills and loses, on a yearly basis can you consistently pull a 100-150% profit. If yes then you’re a genius. If no, to you it may be fun, to me it would mean an ulcer and isn’t worth it. I think you will agree that option trading is not for everyone.

We may have different investment approaches, but your calls are good, not to mention the timing factor.

2006 Aug 31 03:51 AM

[Philip Davis:]

You can check my main blog and go through the past year's picks. In an average week we make about 40% and I can only think of two or three really bad weeks all year.

There's a weekly wrap-up every Friday so it's easy to find the summaries if you want to check.

As to timing, our CHK play looks good at the moment if you want to try one!

2006 Aug 31 09:51 AM