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Proprietary Data Insights Financial Pros Top Home Improvement & Hardware Searches This Month
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Are We Headed For A Recession Or Not? You’ve probably been hearing a lot lately about the increasing likelihood of a recession as we approach 2023. Along with more economists making this prediction, we recently caught a glimpse of a key indicator. One that has – all together now(!) – predicted every single freaking recession for the last 60 years. The Inverted Yield Curve Remember the key words from that last sentence – we recently caught a glimpse. For a moment in time – literally – on Tuesday, the return on the 2-year U.S. Treasury note surpassed that of the 10-year. The spread was minimal – 2.387% on the 2-year and 2.383% on the 10-year – and temporary. But it still triggered a cacophony of dire headlines warning of the possibility of a recession. Don’t freak out. First, we need the inversion to persist for longer than a minute. Something closer to a couple or few months. Second, recessions don’t immediately follow an inverted yield curve. Even a persistent one. They tend to take time – around 12 to 18 months – to materialize. Third, other economic factors play a role. For example, we saw the 3-month yield eclipse the 10-year for several months in 2019. However, there’s no telling if we would have still experienced a recession without a global pandemic crushing hopes for 2020 and beyond. Also, consider jobs data. On Wednesday, ADP reported private-sector employment increased across the board, adding 455,000 jobs between February and March. Source: ADP
These numbers came in slightly ahead of expectations. And just this morning, the unemployment rate came in at 3.6% while the economy added another 431,000 jobs with wages gaining 5.6% YoY. Even if a recession – small or big – looms, stocks could still have room to run. Now is not the time to duck and cover. At least not because you overreacted to a mere moment in time. |
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Home Improvement |
My Home Depot Parking Lot Is Still A ****show |
Key Takeaways:
The best investors keep an even keel. Not jaded or cynical, however you’ve seen this story – whatever it is at the moment – before. That said, if you’re gonna freak out about anything, rising interest rates probably require more immediate concern. Take this otherwise scary data for consumers – which could include you if you’re in the market for a house – and make it work for you as an investor. Source: Freddie Mac
As home prices continue to set record highs, constrained supply combined with these rising rates can make mortgages more expensive. Faced with these roadblocks plus cash buyers sometimes going above asking price, some prospective homebuyers have been entirely pushed out of the market. Earlier this week in The Juice, we focused on how banks, particularly Bank of America (BAC), might fare in this environment. In the shell of a nut, look for banks with relatively low exposure to mortgages, who stand to benefit from increasing net interest income and expanding net interest margin. A Housing Play That Isn’t A Bank Leaving financials aside, Home Depot (HD) deserves a look as the housing market goes insane. If the Home Depot I go to is any indication, business is good. The parking lot remains the same notorious mess it always has been. The lines are long. Plus, here in California, we’re at the epicenter of the nation’s housing shortage. Record housing prices – and all-time high rents – provide some incentive to develop new units, particularly in expensive markets. In California, the government has stepped in, asking cities to update the housing elements of their general plans to add more units. For instance, Los Angeles needs to rezone to accommodate 250,000 additional units. San Francisco must try to squeeze in another 80,000. While all of this homebuilding won’t happen overnight, it’s a going concern across the country and adds to the long-term investment case for Home Depot. In the near-term, the hot housing market provides incentives for home improvement projects. Homeowners tend to view upgrades – even teardowns, which we see quite a bit here in California – as solid investments in a torrid housing market. Especially homeowners who are flush with cash. Home Depot Keeps Growing The company increased revenue and diluted earnings per share by 14.4% and 30.1%, respectively, between fiscal 2000 and 2021. Isolating our analysis to comparable sales and ticket size, Home Depot’s continued growth is beyond impressive, especially when you consider the challenges it faces as a business, such as inflation and supply chain issues. Source: Home Depot Annual Report (Period Ending, 1/31/2022)
Home Depot’s large footprint, subsequent purchasing power, and passing some costs to the consumer have helped the company weather the storms related to price of goods. In its annual report, Home Depot addresses the increased cost of building materials, particularly lumber, noting the challenge it could face if it’s unable to continue passing these costs to customers. So far the company appears to be successful, as it reported double-digit, year-over-year comparable sales increases in 10 of its 14 merchandising departments, led by, encouragingly, lumber. Lowe’s (LOW) also managed its supply chain-related costs well, posting comparable sales increases in 11 of 15 categories, led by electrical, lumber, and flooring. Lowe’s increased its average ticket size to $96.09 in 2021, up from $85.67 in 2020, despite a decrease in the number of transactions. Returning Cash To Shareholders Home Depot still has $9.5 billion remaining in its current share reauthorization program. And it intends to continue returning cash to shareholders via buybacks and its $7.60 annual dividend, which has increased each year for the last 13 years. The next best thing to collecting and reinvesting that dividend would be pocketing a nickel every time I see an almost-fight over a parking space at the Hollywood Home Depot. The Bottom Line: During times of economic uncertainty, it’s easy to get spooked as an investor. However, it’s important to separate your consumer from your investor side. Long-term investments that will make it easier to sleep a full eight hours still exist. Home Depot remains one of the market’s examples of relative stability as a buy and hold, add on dips stock. If you’re interested in the home improvement space, Lowe’s might also be worth a look. Though I’m not sure about the condition of the Lowe’s parking lot. |
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