Lowe's Goes Higher and Higher -- Why?

No one expected Lowe's to beat analysts' expectations this quarter, and to beat them so roundly.  Their sales were up 5.8% to $14.2 billion.  Why on earth would they be doing so well in the midst of this credit crunch and declining housing market?  Is the housing slump really not that bad or do people still invest in their biggest investment (their homes) even when values are perceived to be dropping?

In fairness, it wasn't an entirely rosy picture.  Same store sales fell 2.6%, but that was nothing when compared with Home Depot's sales drop of 5.2%.  The street greeted the Lowe's news with great excitement and the stock rallied significantly.  Not only did Lowe's stock take off, but it pushed up Home Depot's too.   Lowe's report reminded us that the housing market is different region by region and that not all regions are in steep decline.  Another is that people do spend -- and continue to spend in bad times -- on what is for many their biggest asset.  Lowe's teaches us that it is unwise to apply blanket assumptions about consumer behavior based of macro economic indicators.  This is a classical example of the failure of such assumptions.  Lowe's as well as Home Depot are excellent stocks to own -- even in a down market and even in a housing slump.  While they may be competitors, they are the two dominant retailers in this space and have successfully kept others out.     

 

 

Ari Socolow
Ari Socolow: Ari Socolow is the Chief Economist and Editor-in-Chief at BestCashCow. He is particularly interested in issues relating to financial literacy and bank transparency. Since co-founding this website in 2005, Ari has been frequently cited in the media as an expert on local and national savings accounts, CD products, mortgage and loan products and credit card rewards products.

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Comments

  • Ralph Smith

    August 22, 2007

    As we go still deeper into a housing correction - and we will as mortgage resets start to bite - these companies will be impacted. I think that we are 4-8 months away from seeing the opportunities here.

  • ChristySchien

    August 24, 2007

    I don't subscribe to the view that these stocks are contrarian. Few people will not going out and invest in their house because they cannot afford to move. Most are just trying to meet their mortgage obligations.

  • Harnish32

    August 30, 2007

    The average consumer is fine and will continue to invest in their houses. Housing sales and home renovations are not necessarily correlated. A lot of homeowners have sweet mortgages and are planning to stay in their houses for a long time. They are not buying and selling but they will be fixing up, improving, adding-on etc.

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