There’s something to be said about not fighting the tape, regardless of how counterintuitive it may be. As an example, look at the broad markets. Despite coming on strong, the Dow Jones Industrial Average is essentially flat for the week. The near-universal love affair with Apple, Inc. (AAPL) has now turned into a bitter divorce, with shares down 14% since its second quarter earnings report.
Yesterday’s high-fliers are out. Overlooked sectors — like home improvement retailers — are the new stocks to buy.
Look at today’s economy … sure, the labor market continues to add jobs, but people are still worried. One can make a strong argument that such concerns have propelled Donald Trump to the top of the Republican ticket.
However, as exit polls from the latest West Virginia Primaries confirm, this anxiety is a bipartisan issue. Seven out of 10 Democrats have stated that they are “very worried” about the economy.
It isn’t crazy to assume that Americans will find any way to save money, including do-it-yourself projects that they would normally contract out. In fact, entrepreneurship is beginning to see some revival, according to government statistics. Although total self-employment percentages are trending down over the last 20 years, the incorporated self-employed — which typically doesn’t include the agricultural industry — are slowly moving up. That bodes well for DIY companies, making them great stocks to buy.
Finally, we can look at the changing nature of the labor market. According to the ADP Research Institute, outside of the “Professional/Business Services” category — a broad sector that includes seasonal or temporary work — construction jobs are the most improved segment of the labor market since 2010. That’s another compelling argument for home improvement companies as this year’s stocks to buy. Furthermore, construction jobs have seen a 5% gain in labor market share over the last six years.
Admittedly, DIY companies will never have the appeal of a company like AAPL. But then again, neither does losing money. Here are four stocks to buy that are outbuilding the markets.
DIY Stocks to Buy: Home Depot Inc (HD)
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It seems that Home Depot Inc (HD) is in a bit of a tug-of-war. Recently, an analyst from TheStreet issued a warning on HD stock, noting that shares may have hit a technical ceiling.
Further citing HD stock’s narrow trading range and high-volume losses, it was posited that a failure to stay above water could potentially result in a “deep pullback.”
This assessment is in sharp contrast to another report by TheStreet, which elevated HD as a bullish “Chart of the Day.” Which side should investors take?
Whenever there’s an interpretive dispute in the technicals, I defer to the fundamentals.
Here, it’s difficult to be overly bearish on HD stock. This company is atop the retail leader board in terms of in-store sales growth, as well as gains in e-commerce. Furthermore, HD has refused to follow the bigger is better mantra of the retail industry.
At the same time, it has increased its per-square foot sales efficiency by 4.5%. In fact, other retailers are now trying to follow Home Depot’s (profitable) example.
The company’s superiority in this regard plays out in its financials. HD stock is well supported by industry-leading profitability margins. Total revenue has also moved up noticeably higher, with its sales growth rate over the past four years averaging nearly 6%. Recently, quarterly trends confirm that this is no fluke, and that investors should expect to see solid numbers in the future.
Of course, these are not guarantees that HD won’t suffer volatility; however, its top-notch financials and business strategy earns it a place among the long-term stocks to buy this year.
DIY Stocks to Buy: Scotts Miracle-Gro Co (SMG)
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A rising tide lifts all boats — that’s one of the reasons why savvy investors consider Scotts Miracle-Gro Co (SMG) one of the most best home improvement stocks to buy.
Leveraging over a century of experience within the garden products industry, SMG is highly dependent upon Home Depot, Lowe’s Companies, Inc. (LOW), and Wal-Mart Stores, Inc. (WMT).
Together, they contribute roughly two-thirds of global sales for SMG. That’s not bad company, considering that LOW is just under HD in terms of brick-and-mortar and e-commerce sales growth.
However, SMG is more than just a corporate lackey. For starters, it has excellent profitability margins relative to its competitors. Its generous return-on-equity is nearly five times that of the industry average. After a series of ho-hum years, SMG has really started to come along. Over the last four quarters, year-over-year growth has averaged more than 10%. Further, SMG yielded a strong earnings beat for its Q2 fiscal year 2016 report, exceeding consensus by 25%.
Currently, SMG is in a bit of a rough patch in the markets. The stock lost 3% of equity value in April, and is down 8% since the beginning of May.
Despite these troubles, SMG is still up 4% year-to-date. Ultimately, investors should concentrate on the long-term trend. Since hitting a bottom in the summer of 2012, SMG has been moving northward in a decidedly bullish trend channel.
Unless something dramatic was to upset that pattern, SMG has the look of a solid opportunity.
DIY Stocks to Buy: Masco Corp (MAS)
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Popular home fixtures producer Masco Corp (MAS) — whose portfolio includes brand names like Behr paint and Delta faucets — has an important advantage over localized home improvement businesses.
With 21% of total revenue for MAS coming from international operations, the company benefits from positive construction trends both in the U.S. and across the world.
For example, despite slowing Chinese markets, construction remains a significant component of their gross domestic product.
The broad reach of MAS products was put on full display for its recent first-quarter fiscal year 2016 report, where earnings per share came in 22% over forecast. This was helped in large part by $51 million in operating income from the company’s cabinet and related furnishings business — an area that hasn’t been profitable since 2008.
In addition, MAS has been making a concerted effort to clean up its balance sheet, particularly its high debt levels.
Generally speaking, investors are starting to turn around to MAS. On a YTD basis, shares are up 10% despite facing some tricky waters in April. In time, things should continue to look better for MAS. Against forward earnings estimates, the stock is more reasonably priced.
Plus, the remarkable ability of MAS to rejuvenate its moribund cabinets division gives its outlook much more credibility.
Overall, MAS has the appearance of a company on the move.
DIY Stocks to Buy: Universal Forest Products, Inc. (UFPI)
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Last, but not least, we have Universal Forest Products, Inc. (UFPI). Its main claim to fame is its lumber and wood-composite products for the construction and agricultural industry.
UFPI also carries a number of landscaping and renovation materials to satisfy professional builders and ambitious DIYers.
UFPI may not necessarily be the best-looking stock in the home furnishings industry, but it’s definitely one of the most improved. After a few years of inconsistency following the Great Recession, UFPI has impressed with a 12% revenue growth rate during the last four years.
Better yet, UFPI has dramatically increased its margins. In fact, EPS growth over the past three years beats out 98% of its competitors.
Of course, the market is where the talk ends and the walk begins. Here, UFPI has had the most impact. At 19% YTD, UFPI handily beats out the other featured home improvement stocks on this list.
Most of the enthusiasm has come over the last three months, with shares gaining nearly 34%. While it may seem as though UFPI is overheated, the long-term trend begs to differ. So long as the fundamentals don’t drastically change for the worse, the company should have a clear road ahead.
With rapidly improving financials, UFPI could potentially turn into a breakout hit.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
