Home Depot (HD, Financial), the largest home improvement store in terms of size and market capitalization, has given up all the gains it made this year. The stock is up 0.67% on a year to date basis, and the decline has been steady since it hit a 52-week high of $139 in August.
The story is eerily similar to what auto stocks went through around the same time last year - declining rapidly due to expectations that the segment has peaked, and then heading down for several months before starting to move sideways. Though auto sales have remained resilient since that time, the fact that they were unable to either exceed the peak numbers or stay very close to them was enough to damage sentiment, which affected the valuation of the entire industry.
The housing market has steadily moved up since the Great Recession, but things have started moving sideways in the last few months.
Source: FRED
To make matters worse, home improvement company Sherwin-Williams (SHW, Financial) and home appliance manufacturer Whirlpool (WHR, Financial) both came out with disappointing numbers, which affected market sentiment in a big way. As we witnessed in the automobile segment, which has been moving sideways since last year, the housing industry could also follow the same pattern. Again, as with the auto market, things are not as bad as a pre-recession trend might be.
It could just be the normal ebb and flow of the economy, but markets invariably react in disproportionate ways. Unlike the automakers, who teetered on the verge of bankruptcy during the last recession, home improvement stores Home Depot and Lowe's (LOW, Financial) showed enormous resilience and stayed profitable despite the country going through the worst housing crisis of our time.
These companies have a solid moat, provide valuable services and are companies that consumers cannot do without. The price drop may continue, but if you want to buy businesses that can stay strong in adverse conditions, then now is the time and the home improvement market is it. The more the price drops, the more stock we should be accumulating.
Disclosure: I have no positions in the stock mentioned above and no intention to initiate a position in the next 72 hours.
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