Is Lowe’s A Buy On Pre-Earnings Weakness?

Analyst Sentiment Firms For Lowe’s Companies, Inc

With Lowe’s NYSE: LOW Q4 earnings report just a month away and shares pulling back from record highs it looks like a buying opportunity is developing. The near-term weakness is driven by the general market malaise tied to COVID, inflation, interest rates, and now bank earnings that have the S&P 500 moving lower. While Lowe’s is likely to be impacted by the spread of Omicron the tailwinds within the home-improvement and construction and industries are strong, very strong, and should lead to outperformance this year if not in this quarter. 

The current Marketbeat.com consensus rating on Lowe’s Companies is a firm Buy with a price target of $264.50. This target projects about 10% of upside for the stock and the upside is growing due to both lower share prices and higher analysts’ expectations. The consensus rating is up 53% over the last year, almost 20% in the last 90 days, and a full 2.0% in the last month on a steadily improving outlook for revenue and earnings. The latest shout-outs come from Evercore ISI and Citigroup and include a price target increase from Citi and a rating upgrade from Evercore. Between them, they are expecting the stock to trade near $286 which assumes about 20% of upside compared to the high price target of $300. 

"Within the fragmented and secularly growing $900bn U.S. Home Improvement market, we believe Lowe’s can profitability grow share. Our Base case of $280 reflects a market multiple on our 2022 and 2023e. Margin upside is hard to find in retailers trading under 20x, and Lowe’s is the least expensive of the HI retail names,” says Evercore ISI in its note to clients. 

Institutional Support For Lowe’s Companies Is Very High 

While the insider activity in Lowe’s is negligible both for the amount of activity and the total insider holdings the institutional activity is not. The institutional activity gives evidence both of rotation and profit-taking as well as a high level of support for the company. The gross of activity, both buying and selling, is worth about $21.8 billion or 13.3% of the market cap with the net of activity near $0.66 billion in favor of the bears. Net-selling is not something we want to see but this is worth less than 0.5% of the market cap and total ownership remains very high at 74%.

The outlook for revenue and earnings is positive but might be underestimating the market for home improvement supplies. The consensus for YOY revenue growth is 2.4% which implies a sequential slow down in growth from 2.75% in the previous quarter. This is on top of a very strong up 26.73% last year so any growth is good but we do think it is underestimating strength in the industry. 

The Technical Outlook: Lowe’s Pulls Back To Support 

Shares of Lowe’s are down about 10% from the very recently set all-time high and may move lower but there are some signs of support close at hand. The price action may move down to the $230 level but we would expect to see a bounce at this level if not a bottom and rebound. The MACD momentum is the more concerning of the indicators as it suggests downward momentum is still building while the stochastic is diverging from the new lows. Divergences are not a guarantee of reversal but do suggest underlying strength in the market at relative levels. Assuming the market does bottom at or near these levels, we would expect to see range-bound trading until earnings are reported and a move higher in their wake.