Home improvement stocks did well in 2020, as the Covid-19 pandemic led to a surge in home buying and improvement projects. Some investors may worry that the stocks will falter when that tailwind recedes, but
says there is reason to be optimistic about the sector for at least the next year.
Analyst Seth Sigman took a look at the shares of home improvement retailers on Tuesday, reiterating Outperform ratings on industry leaders
(ticker: HD) and Lowe’s (LOW), and target prices of $300 and $188, respectively. The fundamental outlook for the stocks is bright over the next 12 to 18 months, he writes, given a “multiyear home investment cycle continuing even in a Covid-recovery scenario.”
That said, Sigman does think the group will see less upside in the near term. The companies face difficult year-over-year comparisons from the initial 2020 lockdowns. Plus, a gradual reopening of the economy as more Americans are vaccinated will give consumers opportunity to spend money in other categories.
Yet the market might be too pessimistic. The analyst argues that home improvement stocks “already seem to be pricing in a normalization in residential investment, which we actually think is far out.” Consensus estimates reflect difficult comparisons with 2020 levels in the quarters ahead, which may turn out better than expected. There are three factors that could keep demand elevated for longer than bears think, according to his research: an “unprecedented gap between strong housing demand vs. very low housing supply,” which should improve this year; a backlog of remodeling projects; and the fact that more time at home means more wear and tear.
In addition, the companies will get a near-term boost from government stimulus and the continuing strength in the housing market. That may allow fourth-quarter same-store sales to potentially hold steady from the third quarter.
Sigman thinks Home Depot has the better risk-reward profile of the two stocks, given that Lowe’s already provided solid guidance, raising the bar. But he is bullish on both ahead of earnings reports later this month.
Write to Teresa Rivas at [email protected]