Home Depot And Lowe's Remain Sturdy Stocks, Raymond James Says

America’s best-known home improvement companies may look like fixer-upper stocks, but they’re fundamentally like good old houses with solid underlying structure and have strong prospects, according to Raymond James.

Home Depot HD and Lowe’s Companies, Inc. LOW traded higher Tuesday after Raymond James offered reassurances about their prospects despite housing concerns.

Raymond James analyst Budd Bugatch reaffirmed Outperform ratings on both home retailers. The firm has a $205 price target on Home Depot and a $110 target on Lowe’s. (See his track record here.)

The Thesis

Bugatch acknowledged the big home stores have had a tough 2018 amid investor concerns over the housing market and fears of what the U.S.-China trade battle may do. Both stocks have underperformed the S&P 500 after years of outperforming the index.

“That said … we still arrive at the view that there has not been a major deterioration in the important fundamentals (home price appreciation, aging housing stock, home affordability, and household formation) that underpin a favorable U.S. home improvement environment,” Bugatch said in a note to investors. “Given our favorable view on the underlying environment, we are remaining constructively rated on both Home Depot and Lowe’s.

“We believe the majority of the fundamentals and key drivers for the home improvement industry remain favorable and support our positive investment thesis on Home Depot and Lowe’s,” he wrote.

Homeowner Confidence

Raymond James says steadily rising home values over the last five years have boosted homeowners’ confidence and willingness to invest in their homes, noting the Case-Shiller U.S. National Home Price Index is up more than 5 percent over the last 12 months, and that home price appreciation has remained above 5 percent year-to-year since July of 2016.

“Now, in the midst of a favorable U.S. housing environment, Home Depot and Lowe’s continue to see an improvement in big-ticket product sales as consumers demonstrate increased comfort in investing in their homes,” Bugatch said.

Bugatch did note the prospect for rising mortgage costs if the Fed raises rates soon, which could impact home improvement store purchases for homes being bought. But he noted mortgage rates are still “nicely below” the median rate since 2000.

“While we will continue to monitor interest rates, we do not believe the current levels will have a materially negative impact on demand for Home Depot or Lowe’s,” Bugatch said.

Price Action

Home Depot was up 1.4 percent to $170.31 Tuesday, while Lowe’s was up 1.3 percent to $91.65.

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