Home prices continue to move higher at a record pace. That’s led to a strong demand for more housing to meet this lack of supply, and existing homeowners are looking to upgrade their homes as well.
These trends point strongly to home supplier companies, and that trend looks set to continue even if home prices moderate in the coming months ahead. The top two players for home improvement are, by far, Home Depot (HD) and Lowe’s (LOW).
Both companies have reported better-than-expected results in recent quarters thanks to trends in home improvements, a trend that looks likely to continue as these stocks report earnings this week.
Both companies have seen gains of low double-digits in the past year, and offer investors a chance to make back some of the money spent on home improvements over time. Both companies trade relatively similarly in terms of their price to earnings, sales, and profit margins, but have different characteristics elsewhere.
Action to take: For investors, Lowe’s is a better play here. The company has a stronger history of rapidly increasing its dividend, and could overtake Home Depot in that respect in the years ahead. The current yield is about 1.7 percent with a low payout ratio with room to grow.
For traders, Home Depot has had slightly better capital gains returns, and has traded better around earnings. A trade like the January $250 calls, last going for about $11.20, could provide mid double-digit returns, especially if shares rally into the end of the year.
Disclosure: The author of this article has no position in the companies mentioned here, but may make a trade after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.