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Should Value Investors Buy Lowe’s Companies (LOW) Stock?

Pershing Square Capital Management recently released its Q2 2020 Investor Letter, a copy of which you can download here. The fund posted a return of 28.9% during the first half of 2020, outperforming its benchmark, the S&P 500 Index which returned -3.1% in the same period. You should check out Pershing Square’s top 5 stock picks for investors to buy right now, which could be the biggest winners of the stock market crash.

In the said letter, Pershing Square highlighted a few stocks and Lowe’s Companies Inc (NYSE:LOW) is one of them. Lowe’s Companies Inc (NYSE:LOW) is a retail company specializing in home improvement. Year-to-date, Lowe’s Companies Inc (NYSE:LOW) stock gained 36.9% and on August 28th it had a closing price of $165.51. Here is what Pershing Square said:

“Earlier this year, Lowe’s began to experience a signifi cant acceleration in demand, as U.S. consumers in lock down began to invest more in their homes, which has contributed to Lowe’s year-to-date stock price increase of 40%. In recent months, Lowe’s sales have refl ected unprecedented demand across the home improvement sector. Lowe’s has also benefi ted from actions taken over the prior year to improve the company’s competitive position, driving additional share gains.

Lowe’s second quarter results refl ected extraordinary 35% U.S. comparable sales growth, substantial operating margin expansion, and robust earnings growth. While comparable sales growth has moderated somewhat in recent months, demand patterns continue to be well above historical averages. Although it is diffi cult to know how much longer the elevated demand environment will persist, we believe the pandemic has provided Lowe’s with a unique opportunity to showcase its improved merchandising, greater in-stock levels, and excellent customer service to a growing base of customers. This should drive greater customer frequency and loyalty, leading to correspondingly higher same-store-sales and profi t margins over the long term.

In 2020, beyond adapting the business for surging demand and the associated operational strains imposed by Covid-19, Lowe’s continues to invest behind critical strategic initiatives, including improving omnichannel capabilities. Management completed the re-platforming of its ecommerce platform earlier this year, and will now focus on enhancing online features and functionality, thereby improving the overall user experience. Lowe’s is also accelerating investments in its supply chain initiatives, a critical element of the company’s longer-term business transformation. We believe that Lowe’s continues to make substantial progress toward achieving each of management’s high-priority initiatives, which will aid Lowe’s future competitive position.

In recent quarters, Lowe’s management has begun to acknowledge its medium-term 12% operating margin target as “not the end point,” but rather “a stop along [Lowe’s] journey,” and has further noted that they believe Lowe’s “can do better than that over time.” As Lowe’s revenue productivity and margins begin to approach its best-in-class peer Home Depot, which achieved a greater than 14% profi t margin last year, it will generate signifi cant increases in profi t, which, when coupled with the company’s likely soon-to-be-relaunched, large share repurchase program should lead to accelerated future earnings-pershare growth.

Despite Lowe’s signifi cant stock price appreciation, it currently trades at approximately 19 times our estimate of Lowe’s next-twelve-month earnings (vs. Home Depot at 25 times), a valuation which does not refl ect its potential for signifi cant future profi t improvement. As a result, we believe that Lowe’s share price has the potential to appreciate substantially as the company continues to make progress on its business transformation.”

Last week, we published an article highlighting Lowe’s Companies Inc (NYSE:LOW) dividend trend. The company is one of the 28 dividend kings in the US.

In Q1 2020, the number of bullish hedge fund positions on Lowe’s Companies Inc (NYSE:LOW) stock decreased by about 8% from the previous quarter (see the chart here), so a number of other hedge fund managers don’t seem to agree with Lowe’s growth potential. Our calculations showed that Lowe’s Companies Inc (NYSE:LOW) is ranked #30 among the 30 most popular stocks among hedge funds.

The top 10 stocks among hedge funds returned 185% since the end of 2014 and outperformed the S&P 500 Index ETFs by more than 109 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds’ poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Below you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.

Video: Top 5 Stocks Among Hedge Funds

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Federal Reserve has been creating trillions of dollars electronically to keep the interest rates near zero. We believe this will lead to inflation and boost precious metals prices. So, we are checking out this junior gold mining stock.. We go through lists like the 10 most profitable companies in America to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. You can subscribe to our free enewsletter below to receive our stories in your inbox:

Disclosure: None. This article is originally published at Insider Monkey.