It’s Time to Take Profits in Lowe’s Companies, Inc. Stock

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LOW stock - It’s Time to Take Profits in Lowe’s Companies, Inc. Stock

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All things equal, I don’t dislike Lowe’s Companies, Inc. (NYSE:LOW) stock. Lowe’s is a solid company. Lowe’s stock isn’t particularly expensive, when taking into consideration benefits from tax reform. And LOW stock historically has performed well. Average annual return over the past decade (including dividends) has been over 17%.

Indeed, I recommended Lowe’s stock on this site roughly ten months ago. A month later, I named it one of 10 “set it and forget it” stocks. But after a huge run of late, and with housing a little shaky at the moment, I’ve become more cautious on LOW stock.

And, of course, there’s the long-running problem with Lowe’s stock: there’s a better play out there, at least if history is any guide.

Keep It Simple and Own Lowe’s Stock

To be sure, there’s a clear case for owning LOW stock. Business is humming along nicely. Same-store sales are up 4% through the first nine months of fiscal 2017 (ending January), after a 4.1% increase in 2016. Operating margins are expanding, guided to rise 120 bps on an adjusted basis this year.

So far, Lowe’s has shown little of sign of pressure from Amazon.com, Inc. (NASDAQ:AMZN) and other online retailers. In fact, competition may even be helping Lowe’s, as one analyst estimated a 50 bps benefit to revenue growth simply from the declining sales of Sears Holdings Corp (NASDAQ:SHLD).

JC Penney Company Inc (NYSE:JCP) has entered the appliance game itself, but Lowe’s, in its most recent 10-Q, called out the category as coming in better than store-wide growth levels.

The overall economy looks strong. That should help renovation spend and, perhaps, new construction. Both efforts would provide a tailwind to Lowe’s sales. Recently passed tax reform will lower the company’s tax expense; Lowe’s already has announced a $5 billion stock repurchase program as a result.

With Lowe’s stock still trading at under 18x forward EPS, the bull case overall still looks very strong. More growth seems to be ahead, but LOW stock actually trades at a discount to the overall market.

The Home Depot Problem

One long-running problem for Lowe’s stock, however, is that its bull case applies equally well, if not better, to rival Home Depot Inc (NYSE:HD). Home Depot has all the same advantages but historically better performance. HD stock has dramatically outperformed LOW stock, for one. Over the past decade, LOW stock has returned a healthy 386%.

HD stock has nearly doubled that, however, returning 746%. The absolute returns obviously are somewhat skewed (the market was already starting to crash in February 2008), but HD has been a better stock over 1-year, 3-year, and 5-year horizons as well.

Indeed, Home Depot seems to simply be a better company. Lowe’s YTD same-store sales of 4% sound good. But Home Depot comps have grown 6.6%. And while HD stock is priced higher (21x forward EPS against 18x for LOW) that outperformance no doubt deserves a premium.

There is a case that Lowe’s should be able to narrow the gap. Indeed, as Lawrence Meyers highlighted last week, activist investor D.E. Shaw Group has made exactly that argument. But it’s easier said than done: Lowe’s has lagged Home Depot for years now. There’s still no evidence in the results that Lowe’s will catch up.

Nor does it seem like an outside fund is going to come up with new ideas that Lowe’s management hasn’t yet considered.

In fact, part of the reason that I recommended Lowe’s stock last year was that Lowe’s performance was getting closer to matching that of its larger rival. But since then, Home Depot once again has pulled away. LOW has benefited from rising sentiment – but that may not last forever.

LOW Stock Is Cheap, But…

There are some signs that sentiment toward HD and LOW is starting to waver. Both stocks have pulled back of late, with Lowe’s stock now down over 7% in less than a month after hitting an all-time high. Broad markets look a little jittery at the moment.

And one key sector that has been hit is homebuilders. NVR, Inc. (NYSE:NVR) is down 12% YTD. D. R. Horton Inc (NYSE:DHI) has fallen 9%, and PulteGroup, Inc. (NYSE:PHM) has dropped 8%. Rising interest rates are raising fears about the health of the housing market.

That could bleed into the valuations of both HD and LOW – and appears to have done so already over the past few sessions.

Certainly, there’s not enough here to even consider a short of Lowe’s stock. But the Home Depot issue remains. If an investor believes these recent sell-offs are overdone, it’s more logical to buy NVR or DHI. For exposure to the home improvement retail channel, it’s either LOW stock or HD stock – and once again, Home Depot seems to be the better pick.

That doesn’t mean Lowe’s stock is a bad pick, by any means. Certainly LOW shareholders over the past few years have been well-rewarded. But they could have done even better elsewhere, and I believe that’s still the case going forward.

As of this writing, Vince Martin has no positions in any securities mentioned.

After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets.


Article printed from InvestorPlace Media, https://investorplace.com/2018/02/low-stock-take-profits/.

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