Invest in Lowes or Build a Sector Fund to Profit from Stay-at-Home Trend?

Now is the perfect time to own companies that are benefiting from the new normal. Thanks to Covid-19, many consumers work from home, order groceries online, teach kids in the basement and rarely venture far.

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Consequently, home improvement companies like Lowes (NYSE:LOW), Home Depot (NYSE:HD), and Sherwin Williams (NYSE:SHW) are enjoying stellar profits and returns.

Lowes’ price skyrocketed through 2020 and into 2021 as homebound investors beautified their surroundings. During the previous 12 months, the stock grew over 40%. But, at some point the Covid-19 pandemic will abate and consumers will spend more time away from home. When “normal” life returns, will the boon for home improvement wane?

If you’re looking to capitalize on the work-from-home trend, then you might investigate the home improvement category. First, assess Lowe’s and its competitors. Then decide whether you want to buy a sector fund, individual stock, build your own fund, or wait for a pullback in stock prices.

Consumer Cyclical Sector

Lowe’s belongs to the consumer cyclical sector and home improvement retail industry. The “cyclical” term hints that the stock might be sensitive to changes in the economy.  Yet, the current 1.3% dividend provides cash flow, regardless of the share price.

Fundamental investors, those who analyze factors such as profitability and valuation ratios, might check out Morningstar’s fair value assessment of $145.00 versus the recent close of $177.13. Yet, Lowe’s current forward PE ratio is 19.69. This metric compares favorably with the 5-year average P/E ratio of 25.23.

Profitability ratios also bode well for LOW. The current return on assets of 11.79% is significantly higher than the 8.93% five-year average and surpasses the 7.61% return on assets for the related index. Similarly, the trailing 12 months (TTM) return on equity is a robust 163.58% versus the healthy 74.03% five-year average. Similarly, the TTM return on invested capital is 21.66% in contrast with the five-year average of 16.65%. Margins also hold steady or trend upwards, adding more support for LOW.

So what does the future hold for Lowe’s and home improvement, in general?

There is room to expand into underserved markets like smaller city stores. The company continues to embrace a Total Home strategy that seeks to offer everything that a homeowner needs for renovation and remodeling in every corner of the home.

This will benefit do-it-yourself homeowners and professionals.

As long as interest rates remain low, which is predicted for the foreseeable future, the real estate market will likely continue to prosper. Continuing home sales equates to a need for home improvement upgrades.

The two competitors, Home Depot and Sherwin Williams, are also poised to benefit from the stay-at-home environment.

Next, find out whether you should invest, wait, or craft a do-it-yourself sector fund.

Invest in Lowe’s, Home Depot, or Build Your Own ETF?

Morningstar lists Home Depot and Sherwin Williams as the biggest competitors to Lowe’s. All three are overvalued according to historical measures. Of course, it will take some searching to uncover stocks that aren’t overvalued in this frothy market.

The five-year annual EBITDA margin % for the three is:

Company five-year annual earnings growth (EBITDA)
Lowes 10.54%
Home Depot 16.30%
Sherwin Williams 15.67%

EBITDA margin stands for earnings before interest, taxes, depreciation, and amortization. It explains profitability between companies while eliminating the effects of financing and accounting decisions and provides an apples-to-apples comparison of earnings growth.

Historical annualized growth rates for Lowes, Home Depot, and Sherwin Williams as well as the sector are as follows:

Company/Sector one-year growth rate 10-year growth rate
Lowes 48.38% 22.75%
Home Depot 20.54% 23.63
Sherwin Williams 27.39% 24.51%
Sector 30.99% 24.62%

Clearly, all players are growing. Home Depot wins the earnings growth rate with a second- and third-place finish going to Sherwin Williams and Lowes.

The stock prices are also exploding both near-term and over the past decade.

Considering the economy and several profitability and valuation metrics, decide whether now is the right time to buy. Currently, all the shares are considered overvalued based upon analysts and historical valuation metrics.

Assess whether to diversify and create your own sector fund. M1 Finance is a handy platform for creating your own ETF-like portfolios. The advantage to using the platform is that if you want to equal weight all the holdings, M1 will rebalance back to your preferred asset allocation whenever you desire, or when you add funds to the portfolio.

To take advantage of the new “at-home” lifestyle, brought on by the pandemic, you might consider investing in not only Lowes, Home Depot, and Sherwin Williams, but also add in other diversified home-related companies like Walmart (NYSE:WMT), Target (NYSE:TGT) and Wayfair (NYSE:W). By creating your own sector fund, you’re adding in diversification that might help offset declines in the more narrowly focused home improvement firms.

Finally, as long as interest rates remain low, it’s likely that the housing market will remain strong and homeowners and renters alike will enjoy improving their domains.

On the date of publication, Barbara Friedberg was long LOW.

Barbara A. Friedberg, MBA, MS is a veteran portfolio manager, expert investor, and former university finance instructor. She is editor/author of Personal Finance; An Encyclopedia of Modern Money Management and two additional money books. She is CEO of Robo-Advisor, a robo-advisor review and information website. Additionally, Friedberg is publisher of the well-regarded investment website Barbara Friedberg Personal Follow her on twitter @barbfriedberg and @roboadvisorpros. As of this writing, she did not hold a position in any of the aforementioned securities.

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