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This week our theme is recovering stocks that are seeing a catch-up. We look outside North America to Japan, which is catching up to North America and western Europe in terms on vaccinations and their economy, and we see underdog Lowe’s gaining ground on rival Home Depot.
iShares Japan ETF (EWJ-N)
Last week, we looked at ETFs. Here’s another one, and it capitalizes on the current rally in Japanese stocks and their recovering stocks. The Japanese haven’t seen their market climb this high since April 1991, and the catalyst was the sudden resignation of Prime Minister Suga. The Japanese public have been frustrated by Suga’s handling of the pandemic, allowing the Olympics to go forward last July, and have been unhappy with the slow roll-out of vaccinations (though it is now accelerating). Markets hope that the new PM will pump fresh stimulus into the economy, hence the jump in stocks.
A reliable and efficient way to get a piece of Japan’s rally is this tried-and-true ETF that trades in New York. EWJ stock carries US$11.59 billion in assets, trades at only a 5.32x PE and charges an 0.51% MER. Last Friday, it jumped 2.84% to a new high of $71.82 and changed hands at nearly three times its normal volumes. EWJ holds (in order of size) Toyota, Sony, Keyence and SoftBank with Nintendo down the list. EWJ tracks the MSCI Japan index.
Right before last Friday’s rally, 41% of Japanese stocks had been trading below pre-Covid levels, compared to 17% of S&P ones. The Olympic boom never happened. One wonders why the games weren’t scheduled for October instead, just as they had in 1964 when Tokyo last hosted the Olympics, because summers are too humid even for athletes. (Also, an October games would have likely led to some spectators watching the games, hence ticket sale revenues and perhaps international tourism dollars to offset the most expensive games in history.)
Japan has been lagging, but is coming back. How far will this rally go is anyone’s guess, but EWJ stock is worth at least a modest position in your portfolio.
Home Depot (HD-N) vs. Lowes Companies Inc. (LOW-N)
These home improvement giants have been tagged as pandemic plays, which was a blessing last year, but a curse this year. At least, that’s the perception. The truth is that Home Depot has soared from $251 on March 4 to the current range of $310-330. So much for reopenings being a threat. Home owners and builders are still buying lumber, tools and furniture to repair and upgrade homes, though inflation and supply bottlenecks in many products are fueling revenues. After all, the U.S. is enjoying a housing boom amid low interest rates and the drift from cities to the ‘burbs.
Despite sector uncertainty, HD has been beating its quarters, the last four to be precise. In mid-August Home Depot reported YOY revenue popping 8.1%, earnings and revenu beats, and an 4.5% increase in same-store sales over the year. However, this last number wasn’t strong enough for Wall Street which expected 5%, so shares fell 4% on the news. There remains value in the name. Head to head with Lowe’s, HD wins in several metrics: profit margin of 10.55% vs. Lowe’s 7.41%, ROI of 36.61% vs. 24.11% and dividend yield of 2% vs. 1.55%.
Also in mid-August, Lowe’s reported. It too beat earnings and revenues handily, but impressed the street more than HD.
One key area where HD wins is professional contracts vs. amateur DIY customers. The former has picked up this year because homeowners now feel it’s safe to allow contractors into their homes. Already, 45% of HD’s sales come from the pros where that figure is only 25% at Lowe’s. However, Lowe’s CEO is aiming for 30%. His company boasts 35.1% YOY same-store sales growth and a 69% leap in quarterly profits. The company plans to expand online sales and add private brands. True, DIY customers shopped a little less this spring, but those folks were spending more on big-ticket items.
Shares of LOW popped 4% immediately after that report. The street still believes in the name at seven buys and three holds at a price target of nearly $230 that’s over 12% higher than the current level. Home Depot boasts eight buys and one hold at a price target about 11% higher at $363.43.
Even though Delta cases remain a worry, a return to wide lockdowns looks highly unlikely, and the housing boom will continue since there is not a rise in interest rates in sight. This make both LOW and HD buys, though on dips, with the edge going to LOW because it promises better growth. That said, the two companies are similar and both will perform well in the near future.
