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By Erik Kobayashi-Solomon | 02-03-2010 04:39 PM

The Upper Hand in Home Improvement

What it will take for a bullish bet on Lowe's to play out; plus, how rival Home Depot stacks up.

Erik Kobayashi-Solomon: Hi, I'm Erik Kobayashi-Solomon, one of the co-editors of Morningstar OptionInvestor, and today it's my great pleasure to welcome Kim Picciola, who's a senior equity analyst in charge of retail companies here at Morningstar. Kim, thanks for coming.

Kim Picciola: Thanks for having me, Erik.

Kobayashi-Solomon: You know, a couple of weeks ago I wrote up this strategy about how to play Lowe's using options, and I just want to get a little more color about that. One thing that I worry about, every time I walk into one of these do-it-yourself retailers lately, everybody's standing around waiting to help me; two years ago I couldn't get anybody to take any time with me. So, business right now is slow. How much is this bullish position kind of a bet that the housing market will return? Are we betting on a return to the good old days, in other words?

Picciola: No. It's really not a bet on the housing market or a return to the good old days. It's really a bet on the macro economy picking back up and consumers spending on more discretionary items such as the home, really coming back online. Home Depot and Lowe's, both home improvement retailers, really struggled, not only because of the housing market decline but also as the macro environment really hit consumers wallets, and they really had to pull back in terms of their discretionary spending.

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