Driven by the pandemic, home improvement gained popularity and this trend isn’t expected to change anytime soon. Home goods stocks should see their shares rise as the summer provides the perfect environment for more home improvements, which is why David Cohne is recommending Home Depot (HD), Lowe’s Companies (LOW), and Mohawk Industries (MHK).
As most people spent the majority of 2020 stuck at home, many realized that they wanted to spruce up their surroundings. If they were going to spend so much time at home, why not take some of that extra free time from not commuting and add some upgrades into their homes. This created a strong demand for a variety of products, such as lumber, furniture, carpet, and tools.
As the economy has continued to open up and return to normal, more people are headed back into their offices. However, the demand for home improvement hasn’t slowed down. Driven by low rates, fiscal stimulus, and a strong housing market, demand for home goods is still high. As we head into the summer, I believe there will be a further uptick in demand as the warmer months are a great time to do repairs and remodeling.
This demand should keep driving growth higher for home goods stores. So, to find home goods stocks with a great chance of moving higher in the upcoming months, I ran a screen for Buy or Strong Buy stocks in our proprietary POWR Ratings system. Here are three top home goods stocks to consider adding to your portfolio: Home Depot, Inc. (HD), Lowe’s Companies, Inc. (LOW), and Mohawk Industries, Inc. (MHK).
Home Depot, Inc. (HD)
HD is the world’s largest home improvement specialty retailer, with about 2,300 warehouse-format stores offering more than 30,000 products in-store and 1 million products online. Products include building materials, home improvement products, lawn and garden products, plus services such as home improvement installation and tool and equipment rentals.
The company serves three types of customers, DIY, which are typically homeowners who prefer to purchase products and complete projects independently; DIFM, which are homeowners that still purchase products but hire third parties to complete work; and professional customers such as contractors, repairmen, and tradesmen.
HD reported solid numbers for the first quarter, where both sales and earnings improved year over year, driven by strong demand for home-improvement projects. The company has also benefited from its “One Home Depot” plan, which focuses on expanding its supply chain and enhancing its digital experience. Part of this included enhancing its delivery and fulfillment options, which makes ordering easier for customers.
While DIY projects are driving demand for its products, its Pro segment has been a critical growth driver for the company. The Pro segment is seeing robust sales growth, and management expects that to continue. HD has an overall grade of B, which translates into a Buy rating in our POWR Ratings system. The company has a Momentum Grade of A as its stock is up over 21% for the year.
HD also has a Quality Grade of B due to a strong balance sheet. The company had $6.6 billion in cash as of the end of the most recent quarter, compared to only $1.1 billion in short-term obligations. We also provide Growth, Value, Stability, and Sentiment Grades for HD, which you can find here. HD is the #29 ranked stock in the A-rated Home Improvement & Goods industry. You can find other top stocks in this industry by clicking here.
Lowe’s Companies, Inc. (LOW)
LOW is the second-largest home improvement retailer globally, operating about 1,970 stores throughout the United States and Canada. Its stores offer products and services ranging from home decorating and maintenance to repair and remodeling. LOW has strong pricing power as it’s positioned to continue to capitalize on rising demand in the home improvement market.
Its products not only appeal to Do-It-Yourselfers but to commercial customers as well. This explains why it has been investing in technology and merchandise categories for its Pro business. The company’s total home strategy, which includes providing complete solutions for home repair and improvement, should also aid long-term growth.
Like HD, LOW had a strong first quarter. The company reported sales growth of more than 30% in the Pro segment. Sales growth has also been strong in Canada. Even higher than it was in the United States. Management is committed to expanding its market share in the country. LOW also recently announced the purchase of STAINMASTER, a well-recognized carpet brand. This should boost the company’s profile as the only national home improvement retailer to carry STAINMASTER carpets.
LOW has an overall grade of B, which is a Buy rating in our POWR Ratings service. It has a Sentiment Grade of A, which means it’s well-liked by Wall Street Analysts. Twenty-five analysts currently have a Strong Buy or Buy rating on the stock. The company also has a Quality Grade of B, indicating a healthy balance sheet. LOW had $4.7 billion in cash as of the most recent report quarter compared to only $1.1 billion in short-term debt.
The company is also highly efficient, with a return on equity of over 400%. We also grade LOW based on Growth, Value, Momentum, and Stability. You can find those grades here. LOW is ranked #11 in the A-rated Home Improvement & Goods industry.
Mohawk Industries, Inc. (MHK)
MHK manufactures a wide range of flooring products, including carpets, rugs, ceramic tile, laminate, wood, luxury vinyl tile, and vinyl flooring. The company, which started as a U.S.-focused carpeting manufacturer, has turned into a leading global player in the diversified flooring market.
Driven by the pandemic, consumers in the U.S. started investing more in their homes. This included repair and remodeling activities, and new flooring certainly played a role. MHK has undoubtedly benefited from this trend as first-quarter earnings and revenues not only beat estimates, but its quarterly sales were the highest in the company’s history.
Management expects this demand to continue given a strong housing market. The company has also undertaken several initiatives to increase profitability. For instance, it is aligning its ceramic products with demand in the U.S. and realigning its North American carpet operations. The company has also been investing in more sales professionals to boost its market share in new and existing products.
MHK has an overall grade of A, translating into a Strong Buy rating in our POWR Ratings system. The company has a Growth Grade of B, which isn’t surprising as its sales are expected to soar 46.6% year over year in the current quarter. Earnings are forecasted to rise a whopping 881.1% year over year. The company also has a Value Grade of B as its shares look undervalued.
The stock currently sports a forward P/E of 17.64, and its price-to-book ratio of 1.7 is well below the industry average. For the rest of MHK’s component grades (Momentum, Stability, Sentiment, and Quality), click here. MHK is ranked #3 in the A-rated Home Improvement & Goods industry.
HD shares were trading at $320.32 per share on Tuesday morning, up $1.41 (+0.44%). Year-to-date, HD has gained 21.35%, versus a 13.40% rise in the benchmark S&P 500 index during the same period.
About the Author: David Cohne
David Cohne has 20 years of experience as an investment analyst and writer. He is the Chief Value Strategist for StockNews.com and the editor of POWR Value newsletter. Prior to StockNews, David spent eleven years as a consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers.