Will Lowe’s Follow Home Depot’s Slump After Earnings?

Lowe’s (NYSE:LOW) is widely expected to deliver a stellar earnings report when the market opens on August 19. The consensus of analysts is for Lowe’s to deliver earnings per share (EPS) of $2.94. That would be a year-over-year (YoY) increase of nearly 40%.

But once source says the home improvement retailer will post an even better number.  The whisper number for Lowe’s is $2.97 EPS on revenue of $21.29 billion. Investors seem to be expecting this surprise because LOW stock is going up in advance of the earnings report.

But if Home Depot (NYSE:HD) is any indicator, investors may be in for an unwelcome surprise tomorrow morning.

Will Lowe’s stock play follow the leader?

Home Depot and Lowe’s act largely as a duopoly in the home improvement sector. On August 18, Home Depot beat on both the top and bottom lines. Like LOW stock, shares of Home Depot climbed nearly 3% before the earnings report.

But something happened after the market opened. It seems that investors got cold feet and HD stock is down almost 1% in late afternoon trading.

So what does this have to do with Lowe’s? In the first place, there’s a specific reason why HD stock is dropping. Investors don’t think Home Depot will be able to continue the revenue growth the company has enjoyed during the Covid-19 lockdown.

But there’s another reason why this is significant. A look at the growth curve for the two stocks shows that Lowe’s has actually been the better stock during the pandemic. But seeing its stock fall after posting positive earnings is one trend that Lowe’s doesn’t want to follow.

Lowe’s has outpaced Home Depot during the pandemic

When the pandemic started, Home Depot was outperforming Lowe’s. But as the lockdown measures eased, Lowe’s has outperformed Home Depot. This was somewhat surprising because Home Depot was supposed to have a more developed omnichannel strategy. And to be fair, many analysts don’t have much of a handle on why Lowe’s has outperformed during this time.

MarketWatch posted an article that theorizes one reason for Lowe’s performance may have been that Lowe’s took a looser approach to the Centers for Disease Control (CDC) guidelines. Rather than limiting the number of customers in the store, they relied on in-store signs and intercom messages to remind customers of the guidelines.

Will this year’s fourth quarter break a trend?

Over the last five years, the quarter just ended has been the strongest for Lowe’s in terms of revenue. And in that same span of time, Lowe’s stock has reflected that reality. What will this year bring?

Well for starters, I believe that the lingering presence of the Covid-19 pandemic may spur demand for holiday décor. From Halloween and on through the holiday season consumers may be turning their discretionary entertainment dollars into money used for decking the halls like never before.

And let’s not forget that low mortgage rates are finally starting to have an effect on housing and homebuilder stocks. Both of these are positive developments for Lowe’s.

Of course, if the economy gets weaker and the unemployment situation doesn’t significantly improve, many consumers may pull back on spending. Many unemployed workers were citing a significant improvement in their financial situation due to the extra $600 they were receiving from expanded unemployment benefits.

An extension of benefits has long-term consequences for whoever the occupant of the White House will be. However, for Lowe’s that would be a potential catalyst. But as an investor, that’s not something I want to count on.

Remember why you bought Lowe’s stock in the first place

In a market like this, there are a lot of stocks that are acting as impostors. By that I mean having predictable and cyclical stocks such as Lowe’s behave like growth stocks. There is a herd mentality that is being fueled by having more traders actively in the market.

There’s nothing wrong with this. Investors are taking advantage of having some extra time on their hands. And if they want to buy stocks, I’ll let them. But Lowe’s is a value stock first. You’re buying it because you expect a dividend to reward you no matter how the stock performs.

And Lowe’s is still a dividend darling. The company hasn’t increased its dividend this year, yet. But they haven’t suspended or cut it either. In fact, investors of record just received a dividend on August 5, 2020.

The bottom line on Lowe’s stock

A sad reality that is being played out across the country is that many retailers are not going to survive. This means that there will be market share gains to be made. And while Lowe’s won’t get all these gains, they’ll get their fair share.

Combine that with the fact that Lowe’s is catching up to Home Depot in terms of its omnichannel presence. And it trades at a discounted valuation. Whatever happens to the stock in the second half of this year, Lowe’s is a stock to buy.