Home Improvement Retailers: Not a Buy at This Time
Michael is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The housing market is starting to show signs of life. New housing starts rose in November of 2011, giving the home building and building materials industries new hope. Renewed life in the building sector should increase revenues and sales among the building supply wholesalers and retailers. The sluggish US economy has been weighing heavily on the housing and home improvement markets and is evident in store closings and weak earnings. Global expectations of slowed growth and European recession will continue to affect the US economy and stock market.
Home Depot (NYSE: HD) is set for a pullback. The stock has been trending up since August of last year but momentum is waning. HD is one of many dividend bearing stocks favored in the second half of last year. Currently trading around $44 and yielding 2.6%, Home Depot was an attractive dividend play six months ago. At that time HD was trading around $32 and yielding over 3.5%.
Last year's poor performances from the DIA, SPY and QQQ and 2012's gloomy outlook pushed investors into quality dividend producing stocks like HD. Now, Home Depot has been run up to 19 times earnings, overvalued and ripe for profit taking. HD's most recent earnings report, released November 2011, showed a 4.4% gain in sales. This gain beat estimates and increased earnings 17% over the previous year, renewing bullish interest.
Home Depot has been trending up since August of 2011, driven by sales and dividend yield. CFO Carol Tome says the sales reflect Home Depot's customers desire to maintain their homes. Whatever the reason, the bullish momentum is waning as price outpaces the market. The market is overbought and weak, in need of correction. Volume has spiked on some days but is declining in general, interest in HD is falling off. On the long term charts HD is overextended. I expect to see this stock return to its support/resistance line around $40.
Lowe's (NYSE: LOW) third quarter earnings were disappointing, to say the least. The company earned $.18/share according to the report issued Nov. 14, 2011. This is a 44% decline from the same time last year. Store closings and discontinued projects were blamed in the statement. Sales for the quarter were actually up by 2.3% but the rate of store closings outpaced the growth of others. Lowe's is still a good company with support from the market. Roughly three quarter of Lowe's is owned by the big money investment powerhouses. Lowe's is valued around 16 times earnings and pays a dividend yielding around 2.1%.
Lowe's has been trading beneath a ceiling since late 2007. LOW has met resistance at $27.50 three times before and retreated. LOW is currently trading around $27 and looks like it will retreat again, because Lowe's future is still uncertain. Restructuring plans are in place to help revive sales and chain growth but have yet to pay off. One area of improvement is customer satisfaction and virtual experience. Wi-fi will be featured in each store along with increased capabilities online. Each user will be able to store projects, lists and manuals with their MyLowes account. I expect to see LOW continue to trade under $27.50, possibly making a break later in the year.
Fastenal (NASDAQ: FAST) released earnings last week and surprised the market with a 22% gain in net sales and a 34% gain in eps. Unlike Lowe's, Fastenal has been opening stores, increasing by 4.9% in 2011. Fastenal has been growing in the high single digits since 2009. Negative growth in 2008 was entirely due to global economic conditions. The strong growth and dividend have sparked a bull trend in this stock sending it to an all time high. Fastenal is currently valued around 37 times earnings, more than twice the average Dow (DIA) stock and yields around 1.48%.
The long term charts show a strongly trending bull market, but one that is extended and in need of consolidation. There is strength in the indicators so I don't think the pull back will be to severe. Shorter term the stock looks like the pull back is imminent. The bullish momentum is weakening, diverging from price and leaving the stock vulnerable. A small pull back came with the earnings release, a foreshadowing of what will come over the next few months. The slowing world economy could seriously reduce Fastenal's performance. FAST will consolidate between $42.50 and $47.50 while we wait for the European crisis to blow over.
At first glance Lumber Liquidators (NYSE: LL) may well be the gem of the bunch. The stock has been trending up to a resistance level set last year and is forming a flag. The bad news is the resistance may be intense. LL is currently trading around $20.50, near the level the stock opened with last spring during a mass sell off. Resistance was set at $21.25, July 7th of last year. The shares plunged when the company lowered full year guidance. Later in the year the third quarter report claimed profits jumped 57% over the previous year, but still failed to impress investors. Full year sales and revenues were up at that time as well. The next earnings release date is tentatively set for Feb. 15 and will set this stocks direction.
The stock has some bearish pressure. It is over valued with a p/e around 24 and it has a massive short interest. Roughly 13% of the shares are currently short in the market. Lumber Liquidators will not break above $20.50. The momentum, bullish though it is, isn't enough to carry the stock higher. The short interest will drag the stock down to $15. Without a dividend and market support there just isn't reason to invest in Lumber Liquidators. There are much better stocks available that also pay great dividends. Fastenal is the best pick of this bunch.
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