A Certain Type of Investor Should Buy LOW Stock at Current Levels

With tens of millions of Americans still unable or unwilling to enjoy many traditional recreational activities, such as restaurants, bars, and out-of-town vacations, the popularity of home-improvement projects has soared. That trend, which has been great news for Lowe’s (NYSE:LOW). LOW stock, is likely to be robust for at least several more weeks. So, for short-term and medium-term investors, buying the shares at their current levels makes sense.

A Certain Type of Investor Should Buy LOW Stock at Current Levels
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Without a doubt, home improvement has become much more popular during the pandemic. When our area was still locked down, my wife spent many hours on her garden in our backyard, and she went to our local Home Depot (NYSE:HD) at least two or three times per week.

And when Michigan Governor Gretchen Whitmer banned the state’s residents from buying  “seeds, plants, and other home gardening supplies,”  there was widespread opposition to her decision. Part of the reason for the opposition was the fact that, amid the lockdowns, home improvement had become an extremely popular pastime in the U.S.

Home Improvement’s Popularity Soaring

Lowe’s first-quarter results show the extent to which home improvement during the lockdowns replaced activities like shopping, dining out, movies and organized sports. The retailer’s Q1 revenue jumped 10.9% year-over-year. Its comparable sales, for the quarter that ended May 1, soared 11.2%, while its earnings per share jumped 35% YoY.

In April, Lowe’s comp sales soared an incredible 20.4%, and it said that its YoY growth may have been stronger in the first 19 days of May than in April.

For the entire month of May, all spending on home improvement in the U.S. surged 10.4% YOY. That led Stifel analyst Jim Baugh to increase his price target on LOW stock to $156 from $149, Barron’s reported on June 19.

Baugh, who kept a “buy” rating on the shares, noted that some of the large suppliers of Home Depot and Lowe’s recently made upbeat statements about their businesses.  He expects “home improvement spending (to) continue to be strong” going forward.

Impressive Sales Growth Should Continue

Although lockdowns have eased considerably and have even largely disappeared in much of the nation, many activities, including organized sports and nightclubs, remain unavailable. Additionally, tens of millions of older Americans, those with preexisting conditions and many millions of others who prefer to remain cautious are still avoiding restaurants, bars and clothing stores.

As a result, home-improvement activities will likely remain more popular this year than last year. And since Lowe’s, with Home Depot,  is part of a fairly strong duopoly in the home-improvement sector, Lowe’s sales are likely to continue to be strong in the near-to-medium term.

Longer-Term Outlook

The head of an Italian hospital at the end of May reported that the coronavirus is becoming much weaker. I believe that weakness, along with the success of Gilead Science’s (NASDAQ:GILD) coronavirus treatment, has caused U.S. daily coronavirus deaths to drop meaningfully over the last week. For example, in the three days that ended June 22, the average coronavirus death total was 401, versus 1,818 in the three days that ended May 14.

Although the government and the media have not published estimated fatality rates for healthy people under the age of 60, I think that they are now extremely low.  Since the CDC on May 20, when death totals were much higher, estimated the overall real fatality rate at 0.26%, I would be surprised if the current fatality rate for healthy people under 60 is much above 0.1%.

Due to dropping death totals, word-of-mouth information, and occasional articles reporting that the virus has weakened, I predict that at least 70% of healthy Americans will largely resume their pre-pandemic routines by the end of the summer.

As a result, Lowe’s sales growth is likely to decelerate meaningfully starting in August. And while there could be a second wave of the virus in the fall, it is likely to be much less deadly than the first one. That’s because the virus’ strength has already greatly eased and at least one new helpful drug, other than Gilead’s treatment, has already been identified.

However, with a high number of Americans still likely to be sidelined from many activities in the fall, Lowe’s should continue to post pretty good comp sales growth numbers for much of the rest of the year.

Bottom Line on LOW Stock

The retailer’s sales growth should continue to be very impressive for the next couple of months, and investors are not yet expecting many tens of millions of Americans to largely return to normalcy anytime soon. As a result, LOW stock should continue to climb for the next month or two, making it attractive for shorter-term investors.

Starting toward the end of the summer, however, when the company’s sales growth is likely to decelerate, the shares’ performance will become more unpredictable.  As a result,  I would recommend selling them around the end of July or the beginning of August.

As of this writing, Larry Ramer did not own shares of any of the aforementioned securities. Larry has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been airline stocks, oil stocks and Snap. You can reach him on StockTwits at @larryramer.


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