A Question Of Home Improvement

The following question was posed by a reader: Do you think Home Depot (HD) or Lowes (LOW) might be good investments? With the slump in real estate, does that lead to people doing more home improvement projects, rather than buying new homes? Both stocks have been down recently, but could this be a buying opportunity?

On Monday, one of the big investment banks probably called a bottom on Home Depot when it down graded the stock and lowered the 12 month price target to about the current price. My guess is that either of the big two will do well over the long haul. As was stated in the question, it is true that home improvement projects tend to flourish during slow home building cycles.

On the other hand, David Dreman, the author of several books about contrarian investment strategy, wrote a long time ago that after a major "event" it is easy to jump in early. If one jumps in early, the wait can seem to be endless. One has to have great patience in these situations. What commonly happens is that after a year or two of mediocre performance, stocks in this situation have one more test of the low. It is a common mistake for those who got in too early to be flushed out by the test.

I have great respect for Bill Miller, manager of billions of dollars of funds at Legg Mason. Bill is one of those guys that exudes smarts. His record of beating the S&P by better than 2.5% for 15 years in a row speaks volumes. Bill says it is time to buy financial stocks and home builders. Because Bill builds huge positions, he must jump in early to accumulate all the shares he wants.

On more than one occasion, I have ridden his coattails with great success. For example, long after he bought Nextel, I bought shares at $2.90 per share and sold all shares at around $28. He has the great disadvantage of not being able to get in and out so easily. He still owns thousands of shares but has stated that he will trim a number of holdings to make his move into home building and financials. I have seen no indication that he plans to trim his substantial holdings in the airlines. One of his funds carries a weight of around 7.5% in airlines. He does not own Continental Airlines (CAL).

Dreman says it is usually best to wait about a year after a major "event". Again, I have had good success when using this strategy. The trick is to keep the stock in mind and not forget about it when it is not so "in the news."

HD / LOW 1-year chart

Comments

[Malkiel]

Totally speculative, unsupported observation from the peanut gallery: with the growing surplus of homes producing a growing population of desperate sellers, and with the current generation of homeowners being groomed by HGTV to fix up and stage their place to enhance marketability, perhaps Home Depot and Lowe's will have steady business in otherwise unpromising times...