Editor’s note: This story has been updated to reflect current accurate numbers.
With the number of cases of the coronavirus from China approaching six digits, it’s the only news item that people are talking about these days. Logically, this pandemic has negative implications for the broader markets. However, specific names like Lowe’s Companies (NYSE:LOW) theoretically should benefit from this crisis. Since so much of retail’s supply chain is centered in China, LOW stock potentially stood to reap the rewards of panic purchases.
And the panic did happen. Protective gear, such as the now ubiquitous N95 face mask, have been flying off the shelves as the number of cases ticked higher. As a result, ridiculous price gouging on platforms like Amazon (NASDAQ:AMZN) – where disposable masks are selling for ten times their retail price, according to CNBC – have spiked.
Nevertheless, because of the fear for safety, some folks are ponying up the bucks. Now, scalping people in their hour of need is a truly scummy way of profiteering. Nevertheless, let’s set aside the niceties: this should be a huge boon for LOW stock. What other time will you be able to sell mundane products like face masks with such fervor?
It’s not just masks, either. As Reuters reported late last month, other mundane, everyday objects like lighting fixtures experienced shortage pressures. Once people start realizing that it’s not just food and water they should be hoarding, Lowe’s potentially has more demand to fill.
Despite the bullish implication, though, LOW stock is down over 21%, with its trading action looking weak and unconvincing. On the other hand, rival Home Depot (NYSE:HD) shares are only down 3.6%.
Why can’t Lowe’s at least get back up to parity, if not outright challenge its rival?
Unfortunate Timing Clouds LOW Stock
Both Lowe’s and Home Depot belong in the same secular category of home improvement, meaning that all other things being equal, they should weather the storm better than cyclical stocks. Further, they carry products that are in high demand during this pandemic-induced fever. However, that’s where the similarities top.
First, Home Depot has a store count advantage. Essentially, they’re better able to reap the benefits of the coronavirus. Obviously, once inventory of desired goods runs out at Lowe’s, shoppers will run to Home Depot before depleting theirs.
Moreover, Home Depot has a larger footprint where it counts. For instance, Lowe’s has 110 stores in California. In sharp contrast, Home Depot has over 200 stores. If any retailer is going to advantage the coronavirus to scale, it’s going to be Home Depot, not Lowe’s.
Also, one thing to note is that Home Depot stores typically are, at least in southern California, open one hour later than Lowe’s. During panic buying, every hour counts. Even in this seemingly trivial detail, LOW stock loses out.
Second and more importantly, Lowe’s is a company in transition. In the company’s most recent fourth quarter of 2019 earnings report, LOW produced mixed results. Against a consensus target for earnings per share of 91 cents, management delivered 94 cents. But against a revenue forecast of $16.15 billion, the retailer only mustered $16.03 billion. Further disappointing investors was same-store sales, which was up 2.5% against an expected 3.6%.
Under CEO Marvin Ellison, who assumed the top role in 2018, Lowe’s has been eyeballing e-commerce expansion and attracting professional homebuilders and contractors. I think in ordinary circumstances, Wall Street would have extended some patience.
Unfortunately, with the coronavirus, investors are looking for near-guaranteed stability. Simply, LOW stock doesn’t meet that criteria.
The Markets Are Eliminating Risk
Even though Lowe’s is the furthest thing from a tech stock, in this environment, it might as well be. As I’ve explained in prior InvestorPlace articles, this black swan event has shifted sentiment from risk-on to risk-off. By their nature, most tech firms are risky because they’re eschewing profitability for feeding potential growth pathways.
With LOW stock, the risk is in successfully completing the transition to a retailer with balanced brick-and-mortar and online presence. Again, if we were in any other circumstance, I think investors would understand some of the shortfalls in the earnings report. But in this environment, prospective buyers are seeking wealth protection, not gambling on ten-baggers.
I’m afraid that in the nearer term, that leaves LOW stock out in the cold. Also, I’m not a big fan of Lowe’s technical posture. Shares look unsteady, perhaps poised for another drop. At least give this name some time before placing a wager.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.
