Is The Home Depot, Inc. (HD) The Best Home Improvement Stocks To Buy Now?

We recently compiled the list of the 9 Best Home Improvement Stocks to Buy Now according to the hedge funds using the latest sentiment data. In this article, we are going to take a look at where The Home Depot, Inc. (NYSE:HD) stands against the other home improvement stocks.

Home improvement stocks belong to those companies that are typically involved in the home improvement and construction industries. These firms make and sell products used by home owners, builders, and other construction professionals. Naturally, this means that their performance is dependent on the state of the housing industry and the economy - with robust economic growth and high spending allowing them to make more money and grow valuations

The real estate industry is dependent for the most part on interest rates. This is because higher rates mean builders and buyers find it harder to raise capital for their projects and purchases. So, it's natural that home building and home improvement stocks have fluctuated in 2024 as the market adjusts its interest rate cut expectations heading into the year's second half. To understand this performance, we can take a look at how pure play home building stocks have performed and whether their performance also tracks building materials and related stocks.

Indexes that track the former group are up by as much as 52% over the past twelve months as a housing shortage in the US coupled with a tight market created new demand for builders. In fact, these gains (from June 2nd, 2023) had stood at as much as 61% by March 21st when the Federal Reserve had indicated that it could announce as many as three interest rate cuts in 2024. Since then, these stocks have lost roughly 5% due to difficult to tame inflation which has toned down Wall Street interest rate cuts.

Similarly, and as we alluded to earlier, home improvement stocks have mirrored home building stocks. Indexes that track building materials and fixtures are up by roughly 49% over the past twelve months. They have mirrored home building stocks because the growing demand for houses and other buildings means that products such as flooring, plumbing, and piping also sell in higher quantities. Year to date though, and just like home building stocks, home improvement stocks have pared back some of their gains. The peak was on the 21st of March, and between June 2nd, 2023, and March 21st, the gains had stood at roughly 53%. And since then, these stocks have also shed roughly 5% of their gains.

Looking at this, it's clear that interest rates and home improvement stocks are as tightly linked as they can be. Therefore, the next important thing to analyze when it comes to these stocks is the current inflationary, interest rate, and broader macroeconomic environments. On this front, the close of May 2024 provided an important data set in the form of the personal consumption expenditure (PCE) index. The Fed's preferred inflation measure, data from the Commerce Department shows that the PCE rose by 0.3% in April, meeting economist estimates. On an annualized basis, this meant that inflation was at 2.7% in April, still higher than the Fed's goal of 2%, but the data was not a clear cut indicator for a rate cut.

This is because consumer spending, which determines how the economy will perform, slowed down to 2% in the first quarter after the previous reading of 3.3%. After the data release, trackers showed that traders were slightly more optimistic about a potential interest rate cut in September. These odds jumped to 53% after the data release, four percentage points higher than the previous reading of 49%. Crucially, the data confirmed that inflation is not permanent, and the Fed's two decade high interest rates are continuing to achieve their goal of tampering down prices. By June 2024 start, 47% of investors polled by the CME Fed Watch tool are expecting a 25 basis point cut in the Fed's September meeting.

One Fed official who would like to wait before cutting rates is the Minneapolis Fed President Neel Kashkari. In a recent talk with CNBC, the Fed official shared:

I don't think we should rule anything out at this point. We are all committed to getting inflation all the way back down to our two percent target. The most recent inflation print that we got on the CPI data was largely better than the earlier prints from the first three months. But still not where we needed to get to. So it wasn't getting worse, but we just need to wait and see. I think right now we're in a good position because the labor market remains strong in the US. So we have the luxury of being able to sit here until we gain confidence on where inflation is headed.

With these details in mind, let's take a look at some top home improvement stocks that hedge funds are buying.

Our Methodology

To make our list of the best home improvement stocks to buy according to hedge funds, we made a list of stocks that sell items such as home improvement equipment, paints, farming hardware, and others. Then we picked out those that had the highest number of hedge fund investors in Q1 2024. Why do we care about what hedge funds do. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

Home improvement tools

2. The Home Depot, Inc. (NYSE:HD)

Number of Hedge Fund Shareholders In Q1 2024: 70

The Home Depot, Inc. (NYSE:HD) is another well known American home improvement products retailer. The average of 31 one year analyst share price targets is $396.26 and the average share rating is Buy. Following The Home Depot, Inc. (NYSE:HD)'s first quarter earnings report, Bank of America reiterated their Buy rating for the shares and stuck to a $425 share price target. The coverage saw the bank express its confidence in The Home Depot, Inc. (NYSE:HD)'s ability to grow market share with home improvement professionals, as it cited the fact that 50% of The Home Depot, Inc. (NYSE:HD)'s sales are to professional customers as the reason behind its optimism. In comparison, 25% of Lowe's sales come from these customers.

As this year's March quarter ended, 70 hedge funds covered by Insider Monkey's research had bought a stake in The Home Depot, Inc. (NYSE:HD). Ken Fisher's Fisher Asset Management held the largest stake that was worth $3.4 billion.

The firm currently has a forward price to earnings ratio of 21.93. Compared to the S&P 500's forward P/E reading of 21, this means that the home improvement stock is expected to grow roughly in line with the broader market. The Home Depot, Inc. (NYSE:HD)'s shares have gained roughly 52.96% over the past four years, and its revenue has grown by roughly 15%. This shows that the share price growth has outpaced revenue growth, implying that the reason for the growing valuation might be somewhere else than the revenues. Home Depot has also been attracting some ESG investors. Madison Sustainable Equity Fund made the following comment about The Home Depot, Inc. (NYSE:HD) in its Q3 2023 investor letter:

“We updated the sustainable scorecard for The Home Depot, Inc. (NYSE:HD) and maintained our Above Average Rating. Home Depot’s corporate responsibilities focus on three pillars: focusing on its people, operating sustainably, and strengthening its communities. Home Depot continues to focus on its people by investing billions of dollars in wages, training, and benefit enhancement. The company’s environmental targets include the reduction of direct (Scope 1) and indirect (Scope 2) emissions by 42% by 2030, as well as a 25% decrease in emissions related to the “use of products sold” (Scope 3 emissions). Both targets are from a 2020 base year.

Separately, The Home Depot Foundation announced that it will invest $6 million in skilled trades training to address the 400,000 job openings across the construction industry. This grant launches a new program that will provide free, skilled trades training and scholarships for veterans and military families.”

Overall, HD ranks in 2nd place among the 9 best home improvement stocks to buy now. You can visit the 9 Best Home Improvement Stocks to Buy Now to see the other home improvement stocks that are on the hedge fund radar. While we acknowledge the potential of HD as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than HD but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. The article was originally published at Insider Monkey.