I started buying Home Depot shares last week to take advantage of home prices and interest rates. I initially bought 50 shares at about $362. I bought another 50 shares on Wednesday for a few dollars more. The Dow Jones Industrial Average has had a mixed year, up about 7% this year compared to the S&P 500’s 16%+ gain. After rising to $395 in March when the market was expecting up to six Fed rate cuts this year, Home Depot fell to $325 in May as investors lowered their expectations. Home Depot has only started to move again in recent months after a series of weak inflation measures and solid economic data caused bond yields to plummet. Still, the stock remains well below its high of $415 in late 2021 when the COVID-19 pandemic kept everyone at home. The peak came just months before the Fed began its rate hike cycle in March 2022 to combat rising inflation. With the Fed widely expected to cut rates at its September meeting, we wanted to gain exposure to a quality company like Home Depot that has struggled in a high interest rate environment but whose industry is improving as borrowing costs fall. Our investment thesis for Home Depot is rising home turnover, the main driver of sales for home improvement retailers. In previous cycles, the range of mortgage rates where we start to see a significant increase in turnover has typically been around 5% to 6.5%. The next cycle will be no different. During the company’s second-quarter earnings call in August, CEO Ted Decker said, “We’ve already seen activity pick up with mortgages below 6.5%.” When rates fell below 6.5% toward the end of last year, he explained, there was an immediate increase in housing activity, mortgage applications, and mortgage refinance applications. HD YTD mountain Home Depot YTD So where are we now? Mortgage rates fell for the sixth consecutive week last week, from 6.43% to 6.29%. And what did we see? Total mortgage demand increased 1.4% week over week, and refinance applications increased 1%. This is not a big move, but it shows that the trend is moving in the right direction. Mortgage rates are still at the upper end of the aforementioned range. People are waiting for a bigger drop. It may not be that far away. We may be close to the day when mortgage rates settle at 5%. At least, Toll Brothers CEO Doug Yeary thinks so. He said on CNBC’s “Squawk on the Street” on Wednesday that if the Fed cuts rates three times in the fall, 30-year fixed-rate mortgages could fall below 6%. If mortgage rates settle at 5%, the housing market could soar. To be sure, lower mortgage rates will not improve Home Depot’s business overnight. There is usually a lag effect of several months because it takes time to close a purchase and sale contract for a home and then decide what projects to take on. Still, if Yearly is right, now is the time to start buying Home Depot shares, because it won’t be long until mortgage rates reach a prime point where home sales really start to pick up. The criticism of retail right now is that the U.S. consumer is in a shaky spot, but housing is a different story, with rising home prices tending to drive Home Depot sales. As Decker pointed out at an investor conference last week, home equity values have risen nearly $18 trillion since the end of 2019, and there is about $11 trillion in assets available for HELOCs (home equity lines of credit). Looking at these numbers, it’s easy to see why Decker is optimistic that activity will normalize and home sales and remodeling activity will increase again. For now, however, Home Depot still expects same-store sales to decline, and the market won’t recover to growth until the middle of next year. But we want to get ahead of the inflection point. It’s similar to what we’re currently witnessing at Best Buy, which has seen its stock rally rally after releasing two consecutive quarterly reports in anticipation of a return to annual sales growth. One question is why Home Depot is outperforming its biggest rival, Lowe’s. We think both stocks would do well under this theory, but we prefer Home Depot because it has more exposure to professional customers and less exposure to DIYers. Earlier this year, Home Depot bolstered its professional business by acquiring SRS Distribution, a professional building materials company that specializes in pools, landscaping, and especially roofing, for more than $18.25 billion. Management believes the deal expanded its total addressable market by $50 billion to $1 trillion. Another reason to buy Home Depot stock is that falling interest rates should make dividend growth stocks like Home Depot look more attractive to income-hungry investors. The stock currently sports a dividend yield of about 2.4%, which will benefit while you wait for mortgage rates to fall. The company has historically been an active buyer of its own stock, but share buybacks have been suspended until 2026 to fund a $10 billion bond offering to acquire SRS. We have a price target of $420 per share and a buy rating of 1. (Jim Cramer’s Charitable Trust is long HD, BBY. See the complete list of stocks here.) Subscribers to Jim Cramer’s CNBC Investment Club receive trade alerts before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling shares in the Charitable Trust’s portfolio. If Jim talks about a stock on CNBC television, Jim waits 72 hours after issuing a trade alert before executing the trade. The above Investment Club information is subject to our Terms of Use and Privacy Policy, as well as our Disclaimer. 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Why did I start a position in housing and what do I think will happen with this stock?
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