We started buying Home Depot shares last week as a bet on housing and interest rates. Our initial purchase of 50 shares was around $362. We bought another 50 shares on Wednesday for a few dollars more. The Dow Jones is having a mixed year — up about 7% compared to the S&P 500’s gain of more than 16%. After soaring to $395 in March when the market expected as many as six Fed rate cuts this year, Home Depot traded as low as $325 in May as investors reset their expectations lower. Home Depot has finally started to get back on its feet over the past few months after bond yields fell on a series of weaker inflationary prints and resilient economic data. Still, the stock is well below its late-2021 closing high of $415 a share when everyone was nesting during Covid. That peak was reached just a few months before the Fed began its rate-hiking cycle in March 2022 to combat rising inflation. With widespread expectations that the Fed will cut rates at its upcoming September meeting, we wanted to gain exposure to quality companies like Home Depot that have been constrained in this high-interest-rate environment but will see their industries improve as borrowing costs fall. Our investment thesis at Home Depot revolves around a rebound in housing turnover, the primary driver of the home improvement retailer’s sales. In previous cycles, the mortgage rate range where you typically start to see a big increase in turnover has been around 5% to 6.5%. The next cycle should be no different. “We’ve already seen some confirmation that mortgages below the 6.5% level are where activity picks up,” CEO Ted Decker said on the company’s second-quarter earnings call in August. “When rates fell below 6.5% toward the end of last year, he explained, there was an immediate surge in housing activity, mortgage applications, and mortgage refinance applications.” HD YTD mountain Home Depot YTD So where are we today? Mortgage rates fell for a sixth straight week last week, to 6.29% from 6.43%. What did we see? A 1.4% weekly increase in total mortgage applications and a 1% increase in refinance applications. That’s not a lot of activity, but it shows that the trend is moving in the right direction. Mortgage rates are still at the upper end of the range mentioned above. People are waiting for the bigger drop. We may not be too far away. Mortgage rates at 5% may be on the horizon, at least that’s what Toll Brothers CEO Doug Yearley believes. He said Wednesday on CNBC’s “Squawk on the Street” that the 30-year fixed-rate mortgage could fall below 6% if the Fed cuts rates three times in the fall. Once mortgage rates hit 5%, the housing market could take off. Of course, lower mortgage rates won’t improve Home Depot’s business overnight. The delayed effect is usually several months because it takes time to close on a home and then figure out what projects you want to do. However, if Yearley is right, it won’t be long before mortgage rates reach a sweet spot where housing turnover really starts to rise, making now a good time to start buying Home Depot. The blow to retail right now is that the American consumer is on shaky ground, but housing is a different animal because rising home values tend to drive Home Depot sales. As Decker noted at an investor conference last week, home equity values have risen by about $18 trillion since the end of 2019 and the available home equity for the home equity line of credit is about $11 trillion. With those numbers, it’s easy to see why Decker is optimistic that activity will return to normal, and that housing turnover and remodeling activity will pick up again. But for now, Home Depot is still projecting similar sales declines, and the Street doesn’t expect a return to growth until the middle of next year. But we want to get ahead of the curve. It’s similar to what we’re currently seeing with clubhouse name Best Buy, which has now surged in consecutive quarterly reports in anticipation of its return to year-over-year sales growth. One question you might ask is why Home Depot over its main competitor, Lowe’s. We think both stocks could work under this thesis, but we like Home Depot because it has more exposure to professional customers and less to do-it-yourself shoppers. Earlier this year, Home Depot bolstered its professional business with the $18.25 billion acquisition of SRS Distribution, a professional building supplies company specializing in pools, landscaping, and especially roofing. Management believes the deal increased its total addressable market by $50 billion to $1 trillion. Another reason we’re buying Home Depot stock: Lower interest rates should make dividend growth stocks like Home Depot look more attractive to income-hungry investors. The stock currently yields about 2.4%, which also works in our favor as we wait for mortgage rates to fall. The company has historically been an active buyer of its own shares, but buybacks are on hold until 2026 because it financed the SRS acquisition with a $10 billion bond issue. We have a $420 price target on the stock and a 1-equivalent buy rating. (Jim Cramer’s long-term charitable trust is in HD, BBY. See here for a complete list of stocks.) As a subscriber to CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust portfolio. If Jim talks about a stock on CNBC TV, he waits 72 hours after sending a trade alert before executing the trade. The above investment club information is subject to our Terms and Conditions and Privacy Policy, as well as our Disclaimer. No fiduciary obligation or duty is, and is not, created by your receipt of any information provided in connection with the investment club. No specific outcome or profit is guaranteed.
Trending
- Boeing factory workers strike for first time since 2008
- Saudi Arabia expects to receive advanced NVIDIA chips within the next year
- China's plan to boost consumption by encouraging trade has yet to show results
- Booking Holdings CEO Glenn Fogel on how AI is changing travel planning
- Adobe shares fall on weak Q4 revenue outlook
- Oracle shares rise on higher revenue outlook for fiscal 2026
- Tapestry Capri Antitrust Trial: Key Questions About the Merger
- Interest Payments on National Debt Top $1 Trillion as Deficit Swells
Why we started a housing-related hub and where we see this stock heading
