Is it a blip or is there something really wrong?
Today, I was reading a very fine piece of research out of Oppenheimer about how Home Depot (HD) and Lowe's (LOW) have been experiencing a downturn in sales, judging by what we have seen from companies like Whirlpool (WHR) , Masco (MAS) and Sherwin-Williams (SHW) . We do know that appliances, paints, kitchen and bath have been soft -- and their formerly strong sales were integral to the booming "home improvement" thesis that has been the mainstay during a period of tremendous retail turmoil. This slowdown dovetails with what we heard last night from the CEO of Brunswick (BC) , who noted that sales of the top-of-the-line Cybex home-exercise machines have softened, too -- another discretionary item that dovetails with this new slowdown narrative.
So, why did I like this OPCO research note about Home Depot and Lowe's? Because the analyst presented the downturn as a blip, not the start of something bigger, some return to the bad old days where sales just plummeted because of job loss and declining home values.
It is true that in some regions, homes have stopped going up in value -- or have even begun to decline. But that's not the experience across the country. Home spend is a function of several different variables: job growth, which we have; household formation, which is increasing ever so slowly; and, perhaps most important, perceived value of your home.
As Carol Tomé, the fabulous CFO of Home Depot, has explained on her conference calls, the moment that individuals believe that their homes are increasing in value, they view spending on their homes as investments not expenses, and homeowners understand that investments increase home values -- while expenses do nothing but maintain values. People don't mind investing and they hate having to spend.
Now, there is another function that can depress sales: a paucity of homes for sale. Lately, we've had under five month of supply -- a somewhat unusually low number that could hinder turnover, which can therefore inhibit sales. But homebuilders can make up for that supply.
I think it's a blip, because I think that the country's entered into a period of gloom that's politically derived. There simply isn't a moment that you aren't on edge about politics, and the edge of uncertainty pauses everything except staying at home doing nothing -- or perhaps, cooking at home, watching Netflix (NFLX) and ordering from Growth Seeker holding Amazon (AMZN) .
Unfortunately, this is a very hard thesis to prove. It always reminds me of when Jimmy Carter was president and he detected a period of national malaise and gave a speech about how the country better buck up because it's really the people's fault that they had lost confidence.
I don't think it's the people's fault at all. I think the election season has been the most brutal and negative I can ever recall, and that backdrop simply does not create a mood that says go to Lowe's and Home Depot and start working on big projects.
Reluctantly, I am in a trust-me mode when I offer this thesis. I am presuming that the gloom's busted by some resolution -- and we know election day may not produce it. But one thing's certain: The stocks have been hammered. It wouldn't take much to bring them back to life.
My thinking is this. No need to hurry. Why jump the gun? But at a certain point, we are going to see this gloom busted. And when we do, the demographics and historic prompts will kick back in. When they do, these stocks will go higher, not lower. Just not yet.
We have time, especially at this ferocious pace of decline for Home Depot. But it won't be forever before a bottom occurs. As these stocks go down they do, alas, get cheaper, even as the numbers are too high and the charts are among the ugliest in the entire book.