The housing market is in a slump, but if interest rates move lower we could see a rebound in prices, albeit probably not to the same degree as recent years when the U.S. housing market reported superlative growth with strong housing starts and home sales. Prices in prime areas of the country had seen incredible price increases.
But that was then. Home sales are faltering, as are housing starts and permits. The trend is down, but an area that I continue to like is the home renovation area.
In this area, I like large-caps Lowe’s Companies Incorporated (NYSE/LOW, market cap: $48 billion) and The Home Depot Incorporated (NYSE/HD, market cap: $74 billion).
Home Depot, the country’s largest home-improvement store chain, makes more sense to me because of its international exposure and expansion plans. Besides the U.S., retail outlets are found in Mexico and Canada. The company is also attempting to expand in China, which I view as an excellent strategy to take advantage of the strong housing market there.
As I have said in recent commentary, Home Depot is the stock to own in the home-improvement area. Also, in an effort to diversify its revenue stream, Home Depot has a five-year plan to shift some revenue away from retail to its unit that serves professional contractors. This will mean fewer store openings. In addition, Home Depot is looking at setting up gas stations at some of its stores and is currently testing this. If successful, plans call for up to 300 gas stations by 2010.
The company may be experiencing some growth issues at this time, which is not unusual for large companies as they get bigger. But at the end of the day, I would own Home Depot. The valuation is reasonable but is not as good as Lowe’s, yet I believe Home Depot’s global view to growth is a major advantage going forward.