The Impact of the Weak Housing Market on Home-Improvement Stocks

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The housing market has experienced significant challenges over the past year, which has had a detrimental effect on the performance of home-improvement stocks. According to Telsey Advisory Group, this trend is expected to continue well into 2024.

Analyst’s Downgrade of Home Depot and Lowe’s Shares

In light of the upcoming retail earnings season, Analyst Joseph Feldman took a pessimistic stance on Home Depot (HD) and Lowe’s (LOW) shares. He downgraded both companies from Outperform to Market Perform.

Concerns Over the Slow Recovery of the Housing Market

Feldman’s decision to downgrade these stocks is primarily rooted in concerns surrounding the slow recovery of the housing market. Factors such as rising interest rates, limited housing inventory, and decreased affordability have contributed to a decline in existing home sales. Additionally, Feldman highlights that home prices play a crucial role in driving home improvement sales, and they too have been decreasing.

The Connection Between a Strong Housing Market and Home-Improvement Companies

A robust housing market often benefits home-improvement companies as individuals tend to embark on more renovation projects when they move houses. While there have been some initial signs of improvement in the housing market, it is still a long way from a full recovery.

A Potential Turning Point for the Housing Market

Feldman acknowledges that there are indications of the housing market potentially reaching its lowest point or “bottoming out.” The data suggests some stability and a reduction in negative trends. However, he emphasizes that this phase of stabilization may take some time to fully materialize.

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Home Depot and Lowe’s Face Lower Earnings Estimates

The latest report from an analyst has adjusted the fiscal-year earnings per share estimates for Home Depot and Lowe’s in 2023 and 2024. The target prices for both stocks remain unchanged, with Home Depot at $315 and Lowe’s at $225.

While home-improvement companies tend to fare relatively well during housing market slowdowns, the current rise in interest rates is causing homeowners to be more cautious about large-scale projects with hefty price tags. With the uncertainty in the economic environment and increased costs of project financing, construction materials, and labor, the growth of remodeling is expected to be impacted, according to analyst Feldman.

On Tuesday, Lowe’s shares experienced a 2.3% decrease, settling at $218.09, while Home Depot dropped by 1.3% to $324.75. Despite its 9.4% gain this year, outperforming its biggest competitor, Home Depot’s increase of 2.8%, both companies fell behind the broader market. The S&P 500 saw a significant increase of 16% in 2023.

It’s worth noting that Lowe’s is a top pick in the industry.

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