Is The Home Depot, Inc. (HD) A Smart Way to Play a Housing Recovery?

Home Depot can also be compared to Lumber Liquidators Holdings Inc (NYSE:LL), which provides flooring materials for homes, and paint and finish manufacturer and retailer Sherwin-Williams Company (NYSE:SHW). The smaller Lumber Liquidators (its market cap is only $2.4 billion) has been an even stronger performer than Home Depot over the last year, rising about 150%. However, this has placed its valuation at 30 times consensus earnings for 2014 and the most recent data show 24% of the float held short as many market players are skeptical of the company. Sherwin-Williams also has a good deal of future growth incorporated into the stock price; for example, its forward P/E is 17, essentially in line with the home improvement stores. Similarly to Home Depot, its earnings have been up considerably but revenue growth has been much more limited, and so it looks a bit speculative in value terms at its current pricing.

Home Depot (and Sherwin-Williams) seem to be in a better position than Lowe’s in terms of their recent financial performance. However, even in those cases revenue growth has been fairly low considering that their valuations are high enough that the companies would have to deliver strong earnings growth for a period of years. As a result neither of the two looks like a cheap way to play housing at this point.

Disclosure: I own no shares of any stocks mentioned in this article.