Goldman Sachs: Expect Home Improvement Stocks to Gain Strength

During this economic downturn home improvement retailers have declined in sync with the housing meltdown, according to Goldman Sachs analyst Matthew Fassler.

That means retail stocks that have troughed since March 2007 could improve now given the year-over-year comparisons, he said in a note to clients, raising his price target on Home Depot (HD) stock to $33 from $30, and on Lowe’s (LOW) to $27 from $24. The analyst maintained his "buy" rating on Home Depot, and "neutral" rating on Lowe's.

Mr. Fassler noted:

These stocks will likely trade through normalized valuations when earnings visibility improves.

He added that he does not expect trends to turn the corner until the first quarter of fiscal 2009.

When they do, however, we would see valuation overshooting appropriate normalized targets. Also if sales growth accelerates past 5% at stores open for more than a year, operating leverage would kick in at an accelerated rate, driving upside to our normalized forecasts.