For Investors In Lowes, Price Matters Just As Much

Oct. 7.13 | About: Lowe's Companies, (LOW)

By Neal Rau

Lowe's Companies, Inc.'s (LOW) plans to open 10 new stores during the fiscal year, and it has plans to acquire 72 new stores from the California based Orchard Supply Hardware as well, which was a spinoff of Sears Holdings Corp (SHLD). Lowe's is looking to increase its presence in California, a state in which competitor Home Depot has been the clear leader thus far. Shares of Lowe's have outperformed The Home Depot, Inc. (HD) this year, and are currently trading near the yearly highs, so the important question on everyone's mind is, are shares of Lowe's a buy, sell or hold at these levels?

Finding an edge against rival Home Depot is not going to be easy, but Lowe's key strategy of offering the lowest price has been working well, driving revenue higher by 10.3% to $15.7 billion and pushing earnings up by 26% to $941 million. Lowes recently announced a $0.18 quarterly dividend, which is scheduled for Wednesday, November 6. Lowe's has been offering permanently low prices on many items across its stores, which has helped attract more repeat customers. Lowe's has also increased its available products online and started, a website that allows shoppers to save their room dimensions and creates shopping lists.

Remodeling and renovation conditions in the second quarter were at their strongest since the pre-recession period, as Home Depot is looking to accelerate the national rollout of its online repair person referral service, Redbeacon, which it recently purchased. The service offers solutions to homeowners who do not want to take on the projects themselves. This was Home Depot's third acquisition since 2012 related to gaining more home-installation projects and another way to attract repeat customers to their stores over Lowe's.

In spite of all the positives for both Lowe's and Home Depot, such as increasing demand, an improving housing sector, there is a matter of concern for these retailers. Rising mortgage rates might be a deterrent to the growing demand for housing sales and home improvement retailers, and valuations on Home Depot and Lowe's suggest that both companies need an ongoing housing recovery in order to move higher from here. According to the real-time trading report, published by Stock Traders Daily, shares of LOW are close to a test of long-term resistance and near a 52-week high, and for investors who care about price, that might be more important than all the other news out there.

The current government shutdown could also be a factor for Lowe's and homebuilders, as the Federal Housing Administration-backed mortgages account for one-third of new-home purchases. Because of the shutdown, less than one quarter of employees will keep approving those loans, which could eventually hurt sales if we experience an extended shutdown period, reversing the trend toward a strengthening market that we have been experiencing. Buyers might not disappear, but some potential customers would be on hold until the government reopened and cleared the backlog of applications. A lack of homebuyers could hurt stores like Home Depot and Lowe's.

The economic and political headwinds look to be more of a concern than competitors are for Lowe's at this point, and the stock might need a strong catalyst to move above long-term resistance. Even if the government shutdown is resolved quickly and rates remain stable, it does not mean the stock will continue to rise, as stock price matters. The stock is trading near all-time highs and it is close to testing long-term resistance. If the stock tests resistance, and remains below resistance, as defined in our real time trading report, Stock Traders Daily expects lower levels and a test of support. That would make LOW a sell/short at resistance, with risk controls in place if resistance breaks higher.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: By Neal Rau for Stock Traders Daily and neither receive compensation from the publicly traded companies listed herein for writing this article.