After the Storm: Buy Home Depot, Sell Lowe's

The Home Depot
The Home Depot

Hurricane Irene has come and gone, leaving a watery mess of destruction and powerless homes in its wake.

Home improvement stores are the one investing niche that always sets off radars when nature delivers a pummeling. After all, it's these hardware superstores that are transformed into popular outlets for plywood, generators, and batteries before the storms blow into town. These same retailers then see their home improvement supplies fly off the shelves as homeowners and landlords restore their properties after the storm.

Home Depot (HD) and Lowe's (LOW) are the two biggest publicly traded players in this space, and, as an investor, your best bet at this point is to go with the folks donning the orange aprons.

Home Stock, Sweet Home Stock

Investors didn't have a lot of reasons to be optimistic heading toward the latest quarterly reports out of Home Depot and Lowe's earlier this month.

Hardwood flooring specialist Lumber Liquidators (LL) and outdoor patio outfitter Trex (TREX) had dramatically hosed down their near-term expectations earlier in the summer. Folks just weren't interested in laying out fresh planks or finished wood on their floors or weatherproofed wood-alternative decking outside.

Thankfully, Lowe's and Home Depot didn't follow suit. Both do-it-yourself chains posted better-than-expected results, though the market leader is the one that truly stood out.

Home Depot's profitability grew by 14% during the quarter. Comparable-store sales climbed 4.3% during the period, a still-impressive 3.5% if we key in on stateside locations. Home Depot also bumped up its guidance for the entire fiscal year.
Lowe's didn't clean up as nicely, posting flat net earnings growth as comps slipped 0.3% during the quarter. Same-store sales are off by 1.7% through the first six months of the fiscal year.

Multiplying Two-by-Fours

The two superstores have similar metrics. Home Depot is fetching 14 times this year's projected earnings, while Lowe's is fetching just 13 times Wall Street's profit forecast for the identical fiscal year. However, Home Depot is the speedier one. The pros see Home Depot's income per share growing by 16% this year and 14% next year. Analysts are targeting 10% and 13% bottom-line growth at Lowe's over the next two years, respectively.

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Both stocks have similar payouts. Home Depot is yielding 2.9% to the 2.8% rate that Lowe's investors are collecting.

A few years ago, Lowe's was the better pick: The smaller chain had more room to grow. Its better-lit stores and appealing decor made it a hit, particularly with female shoppers.

Times have changed. Home Depot cleaned up the sawdust, eyed international opportunities, and now it's the one with the better foundation.

I live in Miami and have seen Andrew, Katrina, and Wilma blow through here -- along with countless other named storms that proved to be more close calls than catastrophic. As an investor, I'll stick with Home Depot.

Longtime Motley Fool contributor Rick Munarriz does not own shares in any of the stocks in this article. The Motley Fool owns shares of Lumber Liquidators Holdings. Motley Fool newsletter services have recommended buying shares of The Home Depot, Lumber Liquidators Holdings, and Lowe's Companies.

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