The Bull Market for Home Improvement: Why You Should Consider Buying Home Depot Stock

The housing market is showing signs of potential recovery, which presents an exciting opportunity for investors.

Home Depot (HD) has long been recognized as one of the top-performing stocks in the market. The company holds significant competitive advantages in the home improvement retail sector, which boasts a total addressable market close to $1 trillion. Together with its main competitor, Lowe's, Home Depot forms a sort of duopoly, enabling both companies to maintain substantial operating margins and strong returns on investment.

Despite its stature, Home Depot has faced challenges since the peak of the pandemic, as the housing market has slowed down. This slowdown has impacted the company significantly since its revenue is closely linked to home sales and renovation projects. Nonetheless, this situation sets the stage for a potential recovery in the upcoming years, as the housing market is expected to rebound. Here are three compelling reasons to consider buying Home Depot stock now.

1. The Housing Recovery is on the Horizon

After a surge in housing demand driven by the pandemic, the market saw an abrupt decline as interest rates skyrocketed, leading to a drastic drop in home sales. This downturn has adversely affected Home Depot's business operations.

However, recent economic signals indicate a shift. The Federal Reserve has begun its rate-cutting program, initiating a reduction of 50 basis points last month. While mortgage rates have yet to reflect this change, they are predicted to decrease as the Fed aims to lower rates by an additional 1.5 percentage points by the end of next year.

Furthermore, existing home sales currently sit about 30% lower than pre-pandemic levels, leaving vast potential for recovery. As home sales rise, Home Depot is likely to experience significant growth.

Additionally, the U.S. is grappling with a housing shortage estimated to be in the millions, an issue both political parties are inclined to address. As the balance of supply and demand in the housing market stabilizes, Home Depot is poised to benefit significantly.

2. Record High Home Equity Levels

While home sales may be sluggish, home prices have risen steadily. Borrowers are tending to remain in their homes longer, which has culminated in record home equity levels. Currently, Americans hold over $32 trillion in home equity, and as interest rates on home equity loans and lines of credit decline, accessing this equity will become more manageable.

The average borrower currently possesses approximately $214,000 in equity. This available cash will likely lead to an increase in spending on home improvement projects.

Moreover, with the stock market hitting all-time highs, homeowners have another financial resource to draw upon for these projects. The combination of these factors is likely to bolster the housing market recovery and could lead to a substantial increase in Home Depot's stock value.

3. Strong Competitive Advantage

Despite recent fluctuations in sales—with comparable sales dropping 3.3% in its fiscal second quarter—Home Depot's core strengths remain intact. The forecast for comparable sales predicts a decline of 3% to 4% for the entirety of the year.

Nonetheless, the company's margins continue to show resilience. Home Depot is expected to achieve an operating margin of around 13.5% to 13.6% in fiscal 2024. While this figure is slightly down from past highs, it indicates a capacity for profitability, especially as the market begins to recover.

These performance metrics should provide investors with the confidence that the company can navigate any unforeseen challenges in the industry.

Why Buy Home Depot Stock?

Currently, Home Depot's price-to-earnings ratio stands at 27, which may not appear particularly attractive at first glance. However, the potential for substantial leverage in its business becomes apparent when growth resumes. Additionally, the recent acquisition of SRS Distribution is expected to enhance Home Depot's presence in the professional market, allowing the company to better leverage its competitive edge.

Home Depot is a market leader with a solid economic moat and is well-positioned to capitalize on the anticipated housing recovery as well as efforts to address the existing housing shortage across the U.S.

housing, investment, HomeDepot