both fell around 2% on Friday, following downgrades from
which worries that the stocks’ rallies have largely run their courses.
Analyst Brian Nagel cut his rating on Home Depot (ticker: HD) and Lowe’s (LOW) to Perform from Outperform, and lowered his price targets to $305 from $320, and to $180 from $185, respectively. While he still likes the long-term outlook for the stocks, he worries that the recent gains have made them pricey, while comparable sales will enviably slow from their pandemic highs.
Nagel is concerned that the “market is becoming too lax toward chances of a post-Covid-19 sales growth downshift at Home Depot/Lowe’s and potential impact on shares,” especially as the stocks, up about 26% and 34% year to date, are trading above their pre-pandemic peaks.
Of course, no one expects that the companies will be able to keep putting up their big comparable sales gains from earlier this year, but the question is how quickly the drop-off will be. The retailers’ most recent earnings reports were robust, but Nagel believes that ultimately same-store sales will drift back to pre-Covid levels, which investors might not be pricing in at current levels.
That said, he’s not bearish on the stocks, and notes that strong housing data, backed by low mortgage rates, could be a longer-term catalyst for the home improvement industry. An active hurricane season could also boost near-term sales. “We are optimistic that a solid, if not improving underlying backdrop for home improvement retail could offset somewhat the impacts of a post-Covid-19 fade in sales expansion at Home Depot and Lowe’s.”
That said, he does write that amid a “forthcoming ‘post-pandemic reset’ for home improvement retail, we’d look more favorably on Lowe’s, given a strengthening margin recovery story and still discounted valuation.”
Home Depot and Lowe’s were off 1.7% and 2.2% Friday, to $275.19 and $160.10, respectively.
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