Question: Why put your money into Home Depot stock (NYSE: HD) at a price-to-earnings ratio of 28, when Lowe’s stock (NYSE: LOW) is offered at a lower ratio of 22? In fact, you might, particularly when you take into account these straightforward facts:
- Growth: Home Depot is progressing at a quicker rate, with revenue increasing by more than 7% over the last twelve months, while Lowe’s experienced a 3% decrease. In the first half of fiscal 2025, HD reported approximately $85 billion in sales—almost twice that of its competitor.
- Margins: Profitability also leans in favor of HD. Its trailing twelve-month margin exceeded 13%, whereas Lowe’s is closer to 12.4%. For the first half of fiscal 2025, HD recorded a 13.7% operating margin compared to 13.3% for LOW, indicating higher efficiency.
- Tariffs: Both companies encounter comparable exposure to trade risks due to their dependence on imports from China, Canada, and Mexico in areas such as lumber, steel, and tools. The disparity exists in pricing power. HD’s stronger margins and contractor-oriented foundation enable it to pass on costs, while LOW’s DIY-focused customers are more sensitive to price changes, which makes it more susceptible to margin compression.
Is Home Depot A Safe Bet?
While some may view Home Depot as a “safe haven,” its history during previous market shocks suggests otherwise. In the inflation-driven downturn of 2022, Home Depot saw a drop of over 35%, and during the pandemic in 2020, it fell by about 38%. Clearly, HD is not exactly a “safe stock.” Our dashboard How Low Can Stocks Go During A Market Crash illustrates how critical stocks performed during and following the last six market crashes.
Nonetheless, Home Depot has experienced a slight decline, falling from nearly $425 in January of this year to around $413 currently (as of this writing). For investors interested in a potentially more stable and high-performing option, explore the Trefis High Quality Portfolio. This approach has outperformed the market, achieving returns exceeding 91% since its inception.
Home Depot’s Strategic Initiatives Could Drive Growth
Home Depot’s strategy to penetrate the professional market is supported by investments in digital tools, Pro Desk services, and enhancements to in-store experiences. These measures encourage increased customer engagement, even as heightened interest rates prompt consumers to depend more on financing or postpone significant projects. Its scale enables substantial investments in marketing, supply chain, and omnichannel capacities—consolidating a lasting competitive edge. Also check Buy or Sell Home Depot Stock?
Considering that most U.S. homes are now between 31 and 60 years old, the demand for repairs and renovations continues to be strong. Home Depot’s balanced customer base of DIY enthusiasts and professionals adds to this scenario, with professionals—who make larger, repeated purchases—contributing to significant growth. In comparison, professionals represent only about 30% of Lowe’s sales.
Potential Risks to Consider
The primary risk for Home Depot is the potential earnings pressure if escalating costs further shrink margins. Although management had initially refrained from raising prices earlier this year, it is now adopting selective increases in tariff-sensitive categories. This tactic assists in safeguarding profitability without deterring customers, yet extended tariff pressures could challenge even Home Depot’s robust domestic sourcing advantage.
Another risk involves macroeconomic shocks. A sudden decline in housing activity, prolonged high-interest rates, or unanticipated market disruptions could significantly impact demand. Historically, Home Depot has demonstrated that it is not immune to downturns, with possible declines of up to 40% in stressed scenarios.
Long-Term Perspective
Despite these potential difficulties, for long-term investors with a 3-5 year outlook who are willing to accept volatility, Home Depot at its current valuation may provide a compelling entry point. For those looking for strategies to navigate market downturns and possibly turn them into opportunities, considering options like the Trefis Reinforced Value (RV) Portfolio, which has surpassed its all-cap stock benchmark (a mix of the S&P 500, S&P mid-cap, and Russell 2000 benchmark indices) to yield strong returns for investors, or consulting a financial advisor experienced in bear markets could prove beneficial. Remember, substantial wealth can be created in the market by those who maintain a calm and strategic approach during times of volatility.