Explaining These Robust Home-Improvement Names

 | Aug 21, 2013 | 8:30 AM EDT
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Both Home Depot (HD) and Lowe's (LOW) present a mystery: How can these companies put up such strong numbers if rates are rising and the home industry could be slowing? The bear case is that fewer home sales and fewer home equity loans mean fewer renovation projects.

Interestingly, those arguments didn't hold up even in the housing bust. Look at the charts of Home Depot and Lowe's from 2007 to 2010, compared with a random housing name (I used Hovnanian (HOV)). Housing got destroyed, and home improvement slowed down, but not by a lot. It is perfectly within historical patterns for rising rates not to slow down home-improvement projects!

Home Depot (HD) and Lowe's (LOW) -- Daily
Source: Yahoo! Finance

Why? My guess is three-fold.

First, home equity loans slowed down long ago, and no one has equity or willingness to borrow, so most projects are probably now cash.

Second, the huge flow of homes into the hands of institutional landlords means a lot of improvements, paid in cash and using the contractors that buy from these chains as "pro."

Third, if we're seeing fewer home sales, this may mean that people who might have moved will now spend money on renovations, since they are stuck in the house. (This is similar to what happened in 2008 to 2010.) 

The upshot is that I am a willing buyer of both Home Depot and Lowe's even now, in a rising-interest-rate environment. They may not gain at the pace they would have done when housing is booming, but they can certainly provide some countercyclical exposure and hedge being right or wrong on the overall housing trend.

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