Housing is in the doldrums. There is talk of a double dip in home prices, or of a multi-year slog ahead in order to clear the backlog of overbuilding and foreclosures.
From a contrarian perspective, does that make housing-related investments attractive?
When considering stocks that might rise on a home-price bounce, home builders come to mind first. Home and construction-oriented retailers like Lowe’s (LOW) and Home Depot (HD) are not far behind on the list, however.
But which of these retailers makes the better housing play?
A glance at the chart makes it obvious: while Lowe’s followed the housing boom up and then down, Home Depot actually hit its all-time high during the dot com bubble, and benefited mildly at best from the housing cycle. To see this in more concrete terms, we can look at the macro profile of Home Depot:
As shown above, Home Depot is correlated with the S&P (no surprise), but has no statistically significant relationship with home prices! Lowe’s on the other hand has a strong positive relationship with home prices – HiddenLevers’ modelling engine calculates that 74% of the long term variation in Lowe’s price is based on US home prices.
This is a case where HiddenLevers’ economic analysis clearly separates the wheat from the chaff – if you want a home improvement retailer that will benefit from a housing rebound, your pick is LOW, not HD.
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