For the last few months, shares of home improvement stocks have been under pressure. Weakness in the housing market, driven by rising rates and higher material costs, was a main catalyst. But there are several reasons to believe that the home improvement sector is poised for growth, and an opportunity for investors.
First, some analysts think that the weakness in housing stocks is overdone, and the lower end of the housing market remains undersupplied. Second, despite rising interest rates, the U.S. economy is still strong with low unemployment and high consumer confidence readings. And lastly, insiders at home improvement retailers are taking advantage of the recent weakness in share prices to load up on their company's stock. This activity, in combination with the current market environment, could signal that the negative sentiment surrounding housing is overdone and stock prices do not reflect the underlying fundamentals of home improvement companies.
The activity of corporate insiders' transactions is particularly important when a few factors are at play: title-level of those transacting and the size of the transaction. There are several home improvement retailers that meet this important criteria.
Home Depot (ticker: HD). The most recognizable home improvement retailer is arguably Home Depot. For the past several years, sales have consistently grown in the mid-single digits. Recent weakness in this sector has pushed forward price-earnings ratio to 17, compared to an average five-year P/E of 23.2. Since Oct. 1, the stock is down more than 15 percent. In November, a cluster of four directors started buying up HD shares.
Lowe's Companies (LOW). The second largest home improvement retailer, Lowe's has also seen its shares under pressure, with the stock declining 17.4 percent since Oct. 1. Despite mid-single digit growth figures for LOW, the P/E has compressed from a five-year average of 22.5 down to 15.9. Director Brian C. Rogers took this opportunity to buy $880,000 of the stock at $88.02 in late November.
Mohawk Industries (MHK). This flooring manufacturer supplies carpet, ceramic tile, laminate, wood, stone, vinyl and rugs to the nation's largest home improvement retailers. Shares have been hard hit this year, with the stock down over 56 percent YTD and down more than 30 percent since Oct. 1. The average five-year P/E of 19.6 has fallen to 10.63 despite continued mid-single digit revenue growth over the past several years and gross profit margins in the high 20s to low 30s. A divisional president, Brian Carson, bought $313,000 of stock on Oct. 29, and director Filip Balcaen purchased $29,600,000 the same day.
Sherwin Williams Co. (SHW). One of the most recognizable names in paint, Sherwin Williams, peaked at an intra-day high of $479.64 on Sept. 21 before hitting a near-term low of $355.28 on Oct. 25. The company reported sales growth of 5 percent in the third quarter, which was at the low end of guidance, and consequently the stock sold down. While investors sold shares on the weak earnings results, one well-timed director used the weakness to buy $253,000 of the stock on Oct. 29. The purchase, at $375, gave him an impressive gain of 8.4 percent in just one month.
RPM International (RPM). RPM supplies specialty chemical products such as paints, caulks, sealants and adhesives to the largest home improvement retailers. Their brands include Rust-Oleum and DAP. With consistent mid-single digit revenue growth and gross margins in the 40s, this stock has weathered the market downturn and is up 25.2 percent year to date. Despite the strong year to date performance, the stock pulled back from its highs in late September, and multiple directors used the opportunity to buy shares.
The case for each individual stock is boosted by this sector-specific trend that has emerged over the last few weeks. As insiders at these home improvement retailers turn to their own companies for investments, it is wise for us investors to take notice.