Not many college students own a home. But one day, you will likely take the plunge in home ownership. When you own a home, say "goodbye" to partying every weekend and "hello" to you local home improvement store.
As the saying goes, "It’s always something with a home." From window treatments to lawnmowers to roofing to patios, your home can be one gigantic money pit that does give you one reprieve — a sweet-as-all-get-out tax deduction. O.K., you get the picture. Houses cost a lot more than what you put into your mortgage each month.
So, how can you profit from the largest percentage of homeowners in nearly 30 years? Well, let’s see if your helpful hardware stores are nuts and bolts investments for any portfolio.
Home Depot (HD)
Snapshot: The world’s largest orange apron dealer is also the world’s largest home improvement chain. While original founders Bernie Marcus and Arthur Blank have cashed in their lifetime gift card, er, stock options, Home Depot remains a homeowner’s favorite destination.
- Home Depot is where the heart is, especially when you consider that it is expected to take in nearly $81.5 billion in revenues this year with a projection to top $90 billion next year. Yowza!
- When people suffer from Mother Nature’s wrath, Home Depot prospers. In other words, Hurricanes Katrina, Rita and Wilma spurred a massive 17 percent jump in earnings for Q3 2005. People have to prepare and rebuild, so Home Depot is integral on both fronts.
- Trading at 16 times earnings, Home Depot’s stock is much more fairly valued than most stocks on Wall Street.
- Let’s face it. A company that makes this much money should return more than a 0.9 percent dividend yield, or 40 cents a share. If I was an orange apron shareholder, I’d demand a dividend revolt!
- Home Depot has faced a price war with Lowe’s that could eventually drag the company into a pricing fist fight with Wal-Mart. However, this has not really been much of an issue.
- Will rising inflation cause the housing market to tumble and the demand for kitchen sinks, et. al., start to, um, sink?
Lowe’s Companies (LOW)
Snapshot: Lowe’s knows that it is firmly in the number two slot for home improvers. With displays that are designed to appeal to women and new lines of products for sale, Lowe’s is trying to stay on Home Depot’s back porch.
- Lowe’s 20-year track record of a 21 percent annual growth rate is the kind of performance that any investor would like to see.
- Like Home Depot, Lowe’s has profited tremendously from the recent hurricanes, so much so that the company is on pace to grow annual earnings by nearly 26 percent.
- Once again, just like Home Depot – it’s almost like these guys are twin brothers -Lowe’s sells for 16 times earnings, making them fairly valued as well.
- Ditto on lousy dividend yield. Lowe’s has been paying a dividend since the 1960s, yet its yield is a ridiculously, um, low 0.4 percent.
- Insiders have been on a selling spree of late. The theory is that insiders know best about their own company and that a flood of sales is a warning sign for a sell-off. But it doesn’t always ring true, because some insiders are not the ones you should really worry about.
- Ditto again. As goes the housing market and interest rates, so goes Lowe’s. The only difference is people will still need to fix their leaky faucets and broken air conditioners. But they won’t be adding on a pool, porch or patio if the cost of borrowing becomes as steep as 60-foot ladder.
Snapshot: Think fast! Anyone able to tell me what the heck Fastenal does? Why, it’s fasteners of course, and a whole lot more. One of the fastest growing companies in America, Fastenal supplies hardware to retailers, construction companies and industrial builders.
- Builder order backlogs are in strong demand for the next year. Backlogs are like an annuity for companies that must feed the construction supply chain. The only problem is if those orders get canceled.
- Fastenal is on the fast track to grow earnings by 15 percent in the next year.
- Life in the fast lane is pretty good, especially when you consider that Fastenal has absolutely zero debt and $32 million in cash. That’s the kind of balance sheet that we can all love.
- Trading at nearly 40 times earnings, Fastenal has a long way to fall in the event of a major sell-off in the market.
- As goes the housing market, so goes Fastenal. Every housing sector pundit insists that the glory days for housing are behind us. So, should the housing bubble burst, Fastenal better watch out below, because its stock would turn south with it.
- The company has split its stock numerous times, including a 2 for 1 split in November. If you split your stock too much, you eventually dilute the value of your shares. So management needs to be careful of how many times they take a stock split dip in the investing punch bowl.
Michael Abramowitz is a freelance writer based in Florida. To avoid a conflict of interest, he does not currently own any of the stocks mentioned above.
Price quotes are from January 12, 2006.
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