The downgrades continue for home improvement stocks. The industry that surged during the pandemic with a flood of do-it-yourself projects has now come back down to reality. High inflation and interest rates haven’t left many wanting to take out their hammers after all.
Downgrades across the border
The recent downgrades came from construction material and hardware giants Home Depot and Lowe’s, cutting target prices and shrinking them back from outperformers. Both companies will provide 2024 guidance that will likely cause an “unfavourable catalyst” for shares, according to one analyst.
Yet these earnings reports aren’t due out until the end of February, so it might be some time before shares start to fall. Which is why investors will want to pay close attention during that time, and perhaps buy on the dip. But even then, analysts are warning to be cautious of the industry for now.
In the near-term, home improvement retail doesn’t look great. These chains in particular may see persistent weakness in sales, resulting in lower trading.
But that’s just in the short term
While the short term looks bearish, analysts are still bullish about the long-term run for home improvement stocks. These companies continue to offer “structural underpinnings” that allow their retail operations to remain strong in the long run.
Investors should therefore see the fall in share price in the future as a great opportunity to pick up shares in these home improvement stocks. As the market and economy improves, they provide exposure to a strengthening trend in the sector.
If you’re looking for a Canadian option that might provide a similar opportunity, then look no further than Canadian Tire (TSX: CTC.A).
Diversified exposure
Canadian Tire stock certainly provides the exposure to home improvement stocks. However, it also provides exposure to just about everything else. Whether it’s a fishing rod, motor oil, or hockey skates, its retail offerings are vast, to say the least.
Yet again, analysts believe near-term obstacles remain, also predicting lower performance in the short term. This could cause the stock to shrink lower, but again could also provide an opportunity. After COVID-19 lows, the stock has shown steady improvements. And once inflation and interest rates improve, this should only climb higher.
For now, consumers remain cautious on spending, which will put pressure on earnings in the near term. But by the second half of 2024, there should be larger improvements with consumers spending more, and supply chain costs dropping as well.
Bottom line
Overall, this could actually lead to an increase in full-year 2023 results, and 2024 revenue projections. So long term, investors should certainly consider Canadian Tire stock one of the home improvement stocks to watch. So when it drops further, buy it up in bulk!
Shares of Canadian Tire stock currently trade at 15.2 times earnings. Shares are down 8% in the last year as well. The home improvement stock offers a dividend yield at 4.8%, which is higher than its five-year average of 3.24%, with a pay out ratio at 69% as of writing.
