Buy Home Depot's stock because the housing market is bottoming, analyst says

By Tomi Kilgore

Wedbush turns bullish on Home Depot's stock, which tends to materially outperform when interest rates decline

Shares of Home Depot Inc. rallied Wednesday, after Wedbush turned bullish on the home improvement retailer, citing the belief that housing-market fundamentals are bottoming.

Analyst Seth Basham raised his rating on Home Depot's stock to outperform, after being at neutral for at least the past two years. He bumped up his stock price target by 15%, to $380 from $330.

The stock (HD) climbed 1.1% toward a three-week high in premarket trading. It has run up 15.7% over the past three months through Tuesday, while the SPDR S&P Homebuilders ETF XHB has soared 22.8% and the Dow Jones Industrial Average DJIA has advanced 11.2%.

"We believe fundamentals are bottoming and we expect a return to growth by 2H24 on the back of lower interest rates, improving housing trends and rising consumer confidence," Basham wrote in a note to clients.

He estimates that spending on home-improvement projects will increase by "at least" the low-single digit percentage range from a year ago by the second half of the year, with Home Depot a "prime beneficiary."

Basham noted Home Depot's stock that Home Depot's stock was hampered in 2023, as surging interest rates led to plummeting existing-home sales, and as consumers shifted their spending to services. The stock gained 9.7% in 2023, while the S&P 500 index SPX hiked up 24.2%.

But historically, when interest rates fall, Basham said the stock "materially outperformed the S&P 500 in anticipation of stronger housing fundamentals."

Read: Housing sentiment jumps as nearly a third of Americans believe mortgage rates will fall in the coming year.

Basham now forecasts 2024 same-store sales, or sales from stores open at least a year, to grow of 1%, while the FactSet consensus is for a decline of 0.1%.

In comparison, the FactSet consensus for 2024 same-store sales for Home Depot rival Lowe's Companies Inc. (LOW) is a decline of 1.2%.

-Tomi Kilgore

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01-10-24 0851ET

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