Home Depot (HD-N)

They report tomorrow. Lower interest rates will push sales, and the extreme weather is behind us.

Is the top stock to buy in an interest rate cut cycle, which is happening. (The Fed will decide tomorrow.)

Is both a cyclical and secular growth story and can ride any cycle. It can grown in any environment, and not held hostage to interest rates. It benefits from aging homes (that need repairs), Millennials want to own homes and will spend at HD, and the new home shortage which need pro contractors to build them (who spend at HD).

It's too early to enter HD or Lowes, whose earnings will be lower this quarter than the last as their multiple hovers near historic highs. He needs to see more consumer activity here. He's on the sidelines.

A decade-long theme, not short term is in housing, if interest rates fall from 6.7% to 5.5% (likely in 2025). She prefers Home Depot in this space, since competitor LL Flooring went bankrupt, and HD has easy comparisons. They had 7-straight quarters of negative comps, but will snap that. She expects better gross margins.

Two recent Florida hurricanes will be a tailwind for the homebuilders for the wrong reasons. The right reasons are all these new homebuyers in Millennials. The best catalyst are falling interest rates. 2% dividend has seen 10% dividend growth in the last 5 years, but shares are a little pricey now.

Upgraded today, but lags the S&P this year and hasn't done anything in the past two, because rates were high and housing was soft. They had 7 straight quarters of negative same-store sales. So, comps are easy and profitability is strong. She still likes it, but it isn't cheap.

He sold Home Depot to buy Lowes, because it trades at a lower PE and they execute as well. Managers here used to run HD and apply the same playbook at Lowes. Operating margins in the last 10 years have almost doubled. He exited both stocks given higher PEs and weakening consumers. Would like to re-enter later.

Is up 10% this year. Anything related to housing (and falling interest rates) is doing well. He expects a housing boom. So, HD could enjoy a catch-up rally.

The homebuilders and related stock ran up a lot ahead of Jay Powell's Jackson Hole speech last Friday when he announced rate cuts coming. Let this come down before buying. He's watching this because of lower rates coming.

Sales growth not growing. Hard to justify investing at this time. Lower interest rates good for business. Waiting for valuation to bottom out before investing. Strong business with good brand name. 

Aggressive pursuit of pro consumer and 1-stop shopping proposition is helping take share, not only from LOW, but also from general suppliers. Acquisition of SRS takes them into pools, roofing, landscaping; expands its addressable market opportunity. Yield is 2.4%.

Core competitive advantages include expertly knowledgeable floor staff and expanded e-commerce and omnichannel capabilities. 17% compound growth rate over the last decade, bolstered by big share buybacks from time to time. Still 12% off 2021 peak. Trades at 24x earnings. Good combo of value and growth.

The home improvers thrived during the pandemic, then the consumer pivoted to services. Now, this has normalized and as interest rates declined, hone projects will pick up. These type of retailers tend to improve before 1-2 quarters before the Fed cuts then keep doing well. HD has done helpful acquisitions and it focuses on their pro customers. Two tailwinds. It pays a 2.5% dividend, which they never cut.

Wasn't a great quarter, but gross margins beat though the topline was soft. We've seen a bottom, so it's time to get it.

Leg into this slowly. Expect a few more challenging quarters, while their PE is a little high. Even rate cuts won't trigger a bounce in the housing market. In the US, the mortgage rate has fallen from 7% to 6.5%, but the 30-year mortgage is under 4%. A better leading indicator is the price of lumber.