Home improvement and reconstruction activities have taken a hit from the extended 2013-2014 winter season. Cold and snowy weather dampened top lines as customers stayed home and held off on major projects. That said, the sector has performed very well in recent years, and has shown surprising resiliency even during dips in the overall economy. As the weather warms up, business ought to pick up, but investors will want to tread carefully through the current bout of increased volatility in the stock market.
Hardwood Flooring Leads the Way
Within this arena, hardwood-flooring supplier Lumber Liquidators (LL) has led the pack over the past two years. The company owns 318 stores and continues to expand at a rapid pace. For 2014, LL plans on opening 30-40 new stores and remodeling 25-35 of its existing stores. At its highpoint in 2013, the company’s stock price had skyrocketed nearly six-fold over a 2-year period.
Lumber Liquidators has seen its valuation fall to more reasonable levels in recent months, so value hunters will undoubtedly want to give LL some consideration. The recent market correction has partially contributed to this retreat, but investors should exercise extra caution. Federal authorities have scrutinized the company’s sourcing policies. With allegations of illegal sourcing from protected forests, the company will likely want to select more-reputable partners in the future. As a result, long-term margins growth may be somewhat limited.
Hardwood flooring continues to rank near the top of the list for most popular home improvement projects. Highly visible upgrades of this nature typically increase home values and are more easily justifiable. During the housing crisis of 2008, the company exhibited excellent countervailing tendencies. Throughout the housing fallout, homeowners who were willing to wait out the recession saw flooring upgrades as a means to simultaneously improve both their immediate quality of living and future home equity. LL’s cost-conscious products appeal to budget-minded homeowners and contractors. This trend should hold true over the foreseeable future.
Big-Box Home Improvement Retailers Were Also Invited to the Party
Stock prices for big-box retailers like Home Depot (HD – Free Home Depot Stock Report) and Lowe’s (LOW) have also done well in recent years, although their gains have not been as sizable as those for Lumber Liquidators. These relatively more conservative stocks offer a nominal dividend yield and also have a strong history of regular dividend increases.
As comprehensive suppliers of materials for both small and large home improvement projects, HD and LOW saw business pick up steam in tandem with the increased optimism surrounding the housing recovery. During the doldrums of the economic recession, these two retail giants’ stocks traded within a narrow range and were not immune to weakness in global GDP. Although customers continued to spend on maintenance items and some smaller projects, the companies’ wide product assortments encountered uneven support.
What Will Happen?
As weather conditions improve, demand for home improvement projects should rise, but things are far from certain. Sentiments around the housing market have weakened of late, and may curb near-term growth for home improvement retailers. Recent geopolitical instability has also caused consumer confidence to waver. Fears over a broad economic slowdown will likely offset some of the pent-up demand from this past winter.
Over the long term, continued overall economic growth will sustain and lift the prospects of companies in the home improvement sector. For now, rental markets continue to tighten as home ownership remains steady. Some commercial owners are turning to renovations as a way to leverage their pricing power and tap into higher rental rates. Retail customers, however, are likely becoming more hesitant to splurge on major projects.
In this current environment of uncertainty, investors who want to add housing exposure to their long-term portfolios should consider stocks that have some defensive qualities. LL has shown a remarkable ability to grow even during economic downturns, while HD and LOW are well-established players that pay growing dividends. To learn more about these home-improvement stocks, subscribers should check out our in-depth coverage within The Value Line Investment Survey.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.