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Why HD Stock Is Loved and LOW Stock Is Hated

Home Depot and Lowe’s are on seemingly flat footing in the home improvement store hierarchy. But HD stock is far superior to LOW stock. Here’s why.

Home Depot (HD) and Lowe’s (LOW) are the two largest home improvement chains in America. Among consumers at least, the two companies are on almost equal footing in terms of number of stores (both right around 2,000 locations) and near-universal recognition. On Wall Street, things are a bit different: HD stock has been a favorite of income investors for some time, while LOW stock keeps failing to gain traction with investors.

In 2017, HD stock is up 11%, while LOW is up just 3.2%.

In the last 12 months, HD is up 10.9%; LOW is down 4.5%.

Over the last two years, Home Depot stock is up 28.4%; LOW is up a mere 6.7%.

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You would think that the two primary housing stocks would be essentially attached at the hip. Not the case. While their stock chart patterns look similar, the gains in LOW have been far more modest, while the dips have been more severe. Take a look.

HD stock has strongly outperformed LOW stock of late.

Why the difference? It’s not sales. Lowe’s, in fact, has been the much better revenue grower of late, averaging 11.2% growth over the past 12 months, compared to 5.8% for Home Depot.

It’s probably not the dividend, either. With a 2.4% yield, HD’s is better than LOW’s 2.2% yield. But not much better.

Meanwhile, Lowe’s dividend is growing faster, more than doubling from $0.18 to $0.41 per quarter since 2014. Home Depot’s dividend is up a very respectable 89% ($0.47 to $0.89) during that time.

The answer, as it often is when it comes to companies this mature, comes down to profits. Put simply, Home Depot has been more consistent than Lowe’s at growing them of late. While Lowe’s earnings per share declined in two of the last four quarters, Home Depot has increased its bottom line by double digits for 10 straight quarters.

Though Lowe’s did manage to grow profits in its most recent quarter, investors punished LOW stock after EPS and sales results fell short of consensus analyst estimates. In the same quarter, Home Depot narrowly beat analysts’ top-and bottom-line estimates, posting EPS growth of 14%.

In an ever-improving housing industry, Home Depot is posting the kind of profit growth you’d expect from one of the two largest home improvement chains. Lowe’s is not—at least not consistently. When investors are deciding which big home improvement stock to buy to play the housing boom, that’s a key difference.

That could change going forward, especially since LOW looks like the better value stock, trading at 14 times forward earnings estimates to HD’s 18. And analysts expect Lowe’s earnings growth to finally stabilize, anticipating 14% EPS growth both this year and next.

Then again, Home Depot’s expected profit growth is almost identical, at 13.4% this year and 13.6% next year. All things being relatively equal, I’d go with HD stock, as most of Wall Street has been for quite some time. For investors to suddenly abandon HD stock for LOW stock, it will take something far more drastic.

For now, HD looks like the safer housing stock.

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Chris Preston is Cabot Wealth Network’s Vice President of Content and Chief Analyst of Cabot Stock of the Week.