Home improvement stocks look poised to reap the benefits from robust home sales, low interest rates that the Federal Reserve (Fed) has assured aren't rising any time soon, and an unemployment rate that sits at its lowest level since man landed on the moon in 1969.
"Given the importance of rates to housing, this policy change certainly cannot be dismissed," JPMorgan Chase analyst Christopher Horvers told Barron's in relation to the Fed taking a more dovish stance on rates. "Indeed, mortgage rates are 50 basis points off highs, which could lead to housing turnover and pricing better than previously feared and let the category grow longer," he added.
Add increasing demand from the baby boomer and millennial cohorts who want to remodel and/or spruce up their home, and these stocks have a sunny outlook for the foreseeable future. According to statista.com, homeowner improvement and repair expenditure in the United States is expected to increase from $330.7 billion in 2018 to $254.2 billion by the fourth quarter of 2019.
Broad-based selling in May brought about by a deterioration in trade negotiations between Beijing and Washington provides traders with an opportunity take a position in three of the industry's leading large-cap names sitting near crucial support levels. Let's look at each issue in more detail below.
The Home Depot, Inc. (HD)
The Home Depot, Inc. (HD) operates as a home improvement retailer that sells building materials, home improvement products, garden products, and décor products to do-it-yourself and professional customers through warehouse-format stores and online. Despite a wet spring in many parts of the country, the Atlanta, Georgia-based company exceeded analysts' first quarter earnings expectations by 9 cents per share. Revenue in the period also impressed, coming in at $26.381 billion versus a projected $26.378 billion. The nation's largest home improvement retailer expects a roughly $1 billion impact on the company from tariffs imposed on $200 billion worth of Chinese goods, which increased to 20% from 10%. Home Depot stock has a market capitalization of $210.71 billion, offers a 2.67% dividend yield, and is up 11.37% year to date (YTD) as of May 31, 2019.
Home Depot shares trended steadily higher for the first four months of 2019 to come within 2% of their 52-week high set on Sept. 12, 2018. Sellers have gained control of price action over the past six weeks, pushing the stock into a major support area between $185 and $190. Those who take a long position should look for a rise back to the April swing high at $208.29. Exit losing trades if the stock prints a convincing close below the 200-day simple moving average (SMA), as this would invalidate the setup.
Lowe's Companies, Inc. (LOW)
Home improvement retailer Lowe's Companies, Inc. (LOW) offers a line of products for construction, maintenance, repair, remodeling, and decorating. The $74.64 billion company sells its brand-name merchandise and private branded products to homeowners, renters, and professional customers in the United States, Canada, and Mexico. Lowe's missed first quarter earnings estimates by 8.3%, posting adjusted earnings per share (EPS) of $1.22, and subsequently reduced its full-year forecast. CEO Marvin Ellison said that higher costs from trying to improve operations resulted in gross margin contraction during the quarter, but he expects the company to deliver improved gross margin performance over the balance of the year. Analysts have an average 12-month price target on the stock at $117.59, representing a 25.3% premium to Thursday's $93.88 close. As of May 31, 2019, Lowe's shares issue a 1.70% dividend yield and are trading up 1.98% on the year.
The May 22 earnings gap below the 200-day SMA jumps out on the chart for Lowe's. The price continued lower for several trading sessions after the company reported as investors factored in the company's slashed 2019 forecast. Traders should look for an entry point between $90 and $92.50, where the price finds support from the right and left shoulders of an inverse head and shoulders pattern. Consider targeting a move up to $102.50, where the price ironically encounters resistance from the Aug. 22 earnings gap low and the May 22 earnings gap high. Set a stop-loss order just below the $90 support level to manage risk.
Masco Corporation (MAS)
Masco Corporation (MAS) manufactures and distributes home improvement and building products through four business segments: Plumbing Products, Decorative Architectural Products, Cabinetry Products, and Windows and Other Specialty Products. The 90-year-old home improvement company boosted its Decorative Architectural Products unit in 2018 through its acquisition of Kichler Lighting to increase market share in the $6 billion U.S. residential lighting industry. Earlier this year, Masco announced that it was undertaking strategic alternatives for its less profitable cabinetry and window businesses. From a valuation perspective, the company trades at 15.7 times earnings, significantly lower than the industry average multiple of 22.1. Trading at $35.84, with a market cap of $10.52 billion and yielding 1.23%, the stock is up an impressive 23.39% YTD.
Masco shares added most of their 2019 gains in January and February. Since that time, the price has oscillated within a descending channel to establish clear support and resistance levels. Those wanting to swing trade the stock should look for an entry near the channel's lower trendline between $35 and $36. Traders may want to wait for a reversal, such as a hammer or piercing pattern, to print before committing capital. Set a take-profit order at the $39 level – an area the price may run into overhead resistance from the channel pattern's top trendline and 50-day SMA. Cut losses if the stock falls below $35.