Author Topic: Lets discuss Lowe's stock (LOW)  (Read 2280 times)

Paper Chaser

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Lets discuss Lowe's stock (LOW)
« on: October 05, 2020, 09:16:04 AM »
I have a position in LOW from former employment. It's up about 330% from the time of purchase while the S&P is up 125% over the same period. The home improvement sector has seen strong gains this year with LOW currently up 40%, and rival HD up 28% compared to 3% for the S&P overall. LOW currently has a P/E ratio of 22.XX while HD has a P/E ratio of 25.XX for what it's worth.

From an investor's standpoint Home Depot has been the standard in the home improvement/retail sector for years. Lowe's CEO is a former Home Depot exec that has made some significant changes in the last 2 years since taking the job. He was appointed after an active investor more or less fired the old CEO because LOW was trailing HD significantly in share price. The new CEO seems to have narrowed that gap in share price, but LOW is currently trading around 168/share and HD trading over 280/share so there's still a lot of room for improvement if they're going to catch the market leader.

The housing market is crazy at the moment, and the COVID shutdowns actually helped the bottom line for HD and LOW as people upgraded their homes. Both have strong online sales and a reasonable "moat" for materials that aren't likely to see lots of online purchases like lumber, flooring, paint, etc. When I visit my local Lowes, I'm noticing changes in the brands carried but also seeing a lot of the real estate within the store being reused, with the old "service desks" in many departments being greatly reduced in size and prominence, presumably to give the product more of the prime sqft. With the new CEO's arrival there's also been a downsizing in underperforming retail locations/real estate, they've tweaked the staffing model, and renewed a focus on commercial business that was less of a priority in the past. It seems like changes are still being rolled out as well.

So, as a Mustachian it's my goal to eventually divest from my position in LOW and put it all into indexes. That being said, we're still 10+ years from retirement, this is less than 10% of my personal 'stache and quite a bit less than that if including spouse's numbers so we're comfortable with a bit of risk with these funds. When the new CEO was appointed in 2018, we decided we'd give it a "couple of years" to see what happened and now here we are. The changes made seem to have been reasonably effective as LOW has outperformed their competition (HD) by over 30% as well as the overall market in the last 2 years. Do you think I should just cash in and convert to indexes now, or considering their recent performance is it worth giving the new changes a few more quarters to see if they can help to narrow the gap with HD even further?
« Last Edit: October 05, 2020, 09:20:02 AM by Paper Chaser »

ChpBstrd

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Re: Lets discuss Lowe's stock (LOW)
« Reply #1 on: October 05, 2020, 09:44:40 AM »
I'd write monthly covered calls on LOW until the shares get assigned away. I'd use the funds received from the LOW calls to buy calls on the index ETF of your choice. This way you:

1) Eventually exit an unnecessarily concentrated single-stock position.
2) Potentially earn several percent of return from the sale of calls until the LOW position is liquidated, which you then spend buying upside in the index fund.
3) Avoid some of the risk of having the index fund increase in value before you liquidate LOW and reallocate.
4) Potentially make money on both the covered call on LOW and the long call on the index, if for example the index rallies and leaves LOW behind.
5) Reduce the damage if LOW falls while the index rallies.

For example, today you could sell the $170 call expiring in 32 days for $5.30 per share. That's 3.17% of the $167.30 current price, put in your pocket today. If LOW goes up and your position is assigned, you'd be selling for 1.6% higher than today's price plus keeping the 3.17% premium = 4.67% return in a month. If LOW goes down or goes nowhere, you've reduced the damage by 3.17% and you play again next month, earning that premium over and over again until you are assigned.

Meanwhile, you take the $530 you received for every 100 shares you own and use it to buy call options on SPY. This is actually defense, not offense. The main risk of this strategy IMO is the risk that for example, next month SPY is up 10% while LOW went up 0%. That would be a much worse outcome than just trading shares today.

nippycrisp

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Re: Lets discuss Lowe's stock (LOW)
« Reply #2 on: October 05, 2020, 06:46:05 PM »
Sell, particularly if you can offset the gain with some loss harvesting. You acquired a single stock that outperformed the market. Good for you, but you're asking if you should double down and take whatever comes next. You know the risks of what you're doing, and you know that past results don't guarantee future performance. Even if you achieve the same outsized results, it's still a relatively tiny part of your portfolio. I'd take the win and move on.

MustacheAndaHalf

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Re: Lets discuss Lowe's stock (LOW)
« Reply #3 on: October 06, 2020, 09:53:00 AM »
LOW currently has a P/E ratio of 22.XX while HD has a P/E ratio of 25.XX for what it's worth.
... The new CEO seems to have narrowed that gap in share price, but LOW is currently trading around 168/share and HD trading over 280/share so there's still a lot of room for improvement if they're going to catch the market leader.
Lowe's has about 0.75B shares, while Home Depot has over 1.0B shares.  Even if Lowe's and Home Depot had the same stock price, Home Depot would still be a 33% larger company - by market cap.  Market cap and P/E ratios are better for comparing companies than using stock price.

You stuck around because an underperforming company had the CEO replaced, and that worked out - they've been catching up to Home Depot.  It sounds like the easy fixes have been made, and rewarded.  Why do you have confidence Lowe's will outcompete Home Depot going forward?

I'd pick a fraction of the current shares and sell some, locking in the recovery Lowe's had so far.  That fits your overall goal of diversifying.  Also, Lowe's stock rose 50% in the past 12 months... that seems like a rare and large gain.

Paper Chaser

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Re: Lets discuss Lowe's stock (LOW)
« Reply #4 on: October 07, 2020, 05:04:54 AM »
Thanks for the responses. You've given me some creative options that I hadn't considered. Further research will be needed.

LOW currently has a P/E ratio of 22.XX while HD has a P/E ratio of 25.XX for what it's worth.
... The new CEO seems to have narrowed that gap in share price, but LOW is currently trading around 168/share and HD trading over 280/share so there's still a lot of room for improvement if they're going to catch the market leader.
Lowe's has about 0.75B shares, while Home Depot has over 1.0B shares.  Even if Lowe's and Home Depot had the same stock price, Home Depot would still be a 33% larger company - by market cap.  Market cap and P/E ratios are better for comparing companies than using stock price.

You stuck around because an underperforming company had the CEO replaced, and that worked out - they've been catching up to Home Depot.  It sounds like the easy fixes have been made, and rewarded.  Why do you have confidence Lowe's will outcompete Home Depot going forward?

I'd pick a fraction of the current shares and sell some, locking in the recovery Lowe's had so far.  That fits your overall goal of diversifying.  Also, Lowe's stock rose 50% in the past 12 months... that seems like a rare and large gain.

Well, I think a big reason for the uptick in the home improvement sector overall is due to consumers not being willing/able to spend money on recreational things like eating out, vacations, sporting events, concerts, etc and diverting those funds to home improvement instead. I don't expect that to change in the short term (6-12 months) so I'm bullish on the sector as a whole during that time frame. Lowes saw a 30% jump in total revenues and a 135% gain in online sales during Q2. Obviously that's not likely to continue at that rate as shutdowns have been relaxed, etc but I think it shows where/how the money is flowing into the sector rather than other discretionary spending. Low mortgage interest rates and tight supply of homes should help too.

For Lowes specifically, I suppose my optimism stems from a belief that there's simply more room for improvement compared to HD which I see as more or less "maxed out" in share price. You're probably right that a lot of the low-hanging fruit has already been picked, but based on my trips into their stores, changes are still ongoing and things like merchandising updates and a renewed focus on commercial customers (which make frequent, large purchases) will take some time to show up on balance sheets. Feel free to poke holes in this of course. That's what I'm here for.

ChpBstrd

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Re: Lets discuss Lowe's stock (LOW)
« Reply #5 on: October 07, 2020, 08:03:11 AM »
What happens in 6-10 months when a vaccine is being distributed, cruise ships are sailing again, restaurants are open again, people are traveling to see relatives and friends they havenít seen in a year or more, etc. and the thought is maybe replacing that 80ís brass bathroom faucet isnít the urgent matter it used to be? I think when the world opens back up, painting the hallway is going to drop down a notch or two.

MustacheAndaHalf

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Re: Lets discuss Lowe's stock (LOW)
« Reply #6 on: October 07, 2020, 08:40:38 AM »
I doubt things will go back to normal after a vaccine.  The problem is the vaccine effectiveness, which experts keep trying to warn people about... they're okay with 50% effectiveness.  People going to dinner or on a cruise with only 50% protection are going to be cautionary tales.  So I expect we won't go back to normal after vaccines - I expect post-vaccination outbreaks, actually.

That said, there is a very small chance that one of the vaccines being tested is highly effective.  In that scenario, things move very dramatically.  The stock market doesn't need to wait 6 months to understand the implications of a 98% effective vaccine, so the stock prices would move very quickly.  For Lowe's, that means a stock price drop as their loss of business gets priced in.  But this scenario is very unlikely, according to none other than Dr Fauci.

Experts seem to be tamping down hopes for a miracle vaccine, and I tend to side with the experts.  So the most likely scenario is a vaccine that doesn't bring things back to normal, sadly.

Paper Chaser

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Re: Lets discuss Lowe's stock (LOW)
« Reply #7 on: October 07, 2020, 11:16:03 AM »
What happens in 6-10 months when a vaccine is being distributed, cruise ships are sailing again, restaurants are open again, people are traveling to see relatives and friends they havenít seen in a year or more, etc. and the thought is maybe replacing that 80ís brass bathroom faucet isnít the urgent matter it used to be? I think when the world opens back up, painting the hallway is going to drop down a notch or two.

In that hypothetical case, I'd expect revenue to drop to something more along the lines of pre-COVID, but a big part of the recent gains in LOW stock price relative to HD have to do with increasing profitability and market share within the segment more than just a massive jump in revenue in a single quarter. LOW has seen stronger returns than HD in recent years, and I'd attribute a much larger part of their growth to the general housing market than specifically to COVID shutdowns in recent months simply because of the timelines. LOW has certainly benefited from the timing of the shutdowns I think, as the increase in sales happened to be timed really well relative to changes being made within the company which lead to higher than expected profits. I think that clearly impacted the rate of growth that the stock has seen in the last 6 months, and I wouldn't necessarily expect to see the same rate of growth moving forward. But I do think there's room to grow and continue to reduce the gap in share price with HD in the short term.
Cumulative returns since beginning of 2016: LOW- 120.7%, HD- 126.4%, S&P500- 77.1%
                                                       2017: LOW- 136.4%, HD- 109.2%, S&P500- 50%
                                                       2018: LOW- 80.9%,   HD- 48%,     S&P500- 27.3%
                                                       2019: LOW- 79.1%,   HD- 61.6%,  S&P500- 34.5%
                                                       2020: LOW- 39.7%,   HD- 27.9%,  S&P500- 4.5%
                                          Last 6 months: LOW- 85%,      HD- 46%,     S&P500- 28%
                       
                       Annual yearly returns 2016: LOW- -6.7%,    HD- 2.4%,    S&P500- 10.7%
                                                       2017: LOW- 30.7%,   HD- 41.3%,  S&P500- 19.4%
                                                       2018: LOW- -1.1%,   HD- -10.1%, S&P500- -7%
                                                       2019: LOW- 30.9%,  HD- 29.2%,   S&P500- 30.3%
                                                        YTD: LOW- 39.7%,   HD- 27.9%,  S&P500- 4.5%

I should stress that I'm not really looking to make this a long term investment. These funds will eventually get moved into indexes. I'm really just trying to determine the likelihood that LOW continues to outperform the market over the next say 1-2 years. If we think there's a reasonable chance that it outperforms the S&P over that time frame, then I think it obviously makes sense to just keep the money where it is. It would suck to move it over and potentially miss out on an extra 10% or more in returns.
« Last Edit: October 07, 2020, 12:24:08 PM by Paper Chaser »

hodedofome

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Re: Lets discuss Lowe's stock (LOW)
« Reply #8 on: October 08, 2020, 11:13:46 AM »
If it was me I'd just hold onto the shares and sell them slowly in retirement as you need the money. Or maybe you never sell, get to enjoy the dividends, and pass the shares to your kids.

Unless someone really screws it up Lowe's isn't going anywhere in our lifetimes. Building materials is not something you can just buy on Amazon and have delivered in a day or two via Prime. Lowes and Home Depot are now the standard who own the industry, short of some local building material place or a small store chain like Ace.

dondon

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Re: Lets discuss Lowe's stock (LOW)
« Reply #9 on: October 08, 2020, 07:26:08 PM »
Do you think I should just cash in and convert to indexes now, or considering their recent performance is it worth giving the new changes a few more quarters to see if they can help to narrow the gap with HD even further?
I did a quick run on my models and it looks like LOW stock tend to do well in low growth - low inflation environment. If the current projections on growth and inflations are right, it should do well in the next few quarters. Regarding the longer term - I have no idea, it looks like they have been taking on a lot of debt (debt to equity ratio went from 1.6 to 12 in the last 5 years - source ) in the recent years, but that is true for most of US companies. 

Paper Chaser

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Re: Lets discuss Lowe's stock (LOW)
« Reply #10 on: October 12, 2020, 05:06:56 AM »
Do you think I should just cash in and convert to indexes now, or considering their recent performance is it worth giving the new changes a few more quarters to see if they can help to narrow the gap with HD even further?
I did a quick run on my models and it looks like LOW stock tend to do well in low growth - low inflation environment. If the current projections on growth and inflations are right, it should do well in the next few quarters. Regarding the longer term - I have no idea, it looks like they have been taking on a lot of debt (debt to equity ratio went from 1.6 to 12 in the last 5 years - source ) in the recent years, but that is true for most of US companies.

Very interesting analysis, thanks!

J Boogie

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Re: Lets discuss Lowe's stock (LOW)
« Reply #11 on: October 14, 2020, 12:06:54 PM »
I'd write monthly covered calls on LOW until the shares get assigned away.

Yeah, I'd do this too. This is a solid move.

Paper Chaser

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Re: Lets discuss Lowe's stock (LOW)
« Reply #12 on: October 12, 2021, 12:34:25 PM »
So, just over a year later I figured I'd check back in here. I've held onto the stock and made no changes to this point.

Since Oct 2, 2020 (just before this thread was originally started):
LOW - +26.9% to $210/share, P/E ratio is slightly lower at 21.79, 52 week low was $146, 52 week high was $215
HD - +21.1% to $338/share, P/E ratio is slightly lower at 23.8, 52 week low was $246, 52 week high was $345
S&P 500 - +30% to 4360, 52 week low was 3233, 52 week high was 4545
DJIA - +24.6% to 34,500, 52 week low was 26,1XX, 52 week high was 35,6XX

So, some mixed results there. I see similar trends for all four with all of them currently sitting slightly below record highs. LOW has outperformed HD since the thread started, which I consider to be a good sign for the future. But it's performance split the 2 baseline markets, trailing the S&P overall which is a bit of a bummer.

BicycleB

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Re: Lets discuss Lowe's stock (LOW)
« Reply #13 on: October 13, 2021, 09:04:34 AM »
I think it's really smart that you checked back in!

It looks like there have only been a few percent of changes since start of the thread, in terms of relative performance among different alternatives. Does that mean all the same costs/benefits are still in place? If so, maybe the exit strategies previous posters suggested are still valid.

It seems like you were expecting bigger outperformance by Lowe's, though there has been a little compared to Home Depot. Do you take this to mean that your expections will be fulfilled next year, or that it's time to revise your expectation?


MustacheAndaHalf

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Re: Lets discuss Lowe's stock (LOW)
« Reply #14 on: October 13, 2021, 09:20:21 AM »
Why do you say trailing the market overall?

Over the past 5, 10 and 15 years Lowe's has outperformed the market.  The last 6 months, the stock market and Lowe's have mostly fluctuated, waiting for the next stage of the recovery.

Paper Chaser

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Re: Lets discuss Lowe's stock (LOW)
« Reply #15 on: October 14, 2021, 04:31:02 AM »
Why do you say trailing the market overall?

Over the past 5, 10 and 15 years Lowe's has outperformed the market.  The last 6 months, the stock market and Lowe's have mostly fluctuated, waiting for the next stage of the recovery.

Yes, LOW has done very well in the last several years. It's only trailed the market (S&P500 specifically) since the start of this thread. So if I'd converted the money from LOW, into an S&P index fund at the time I started this thread like I was considering, I'd be about 3% better than I currently am. Overall though, still doing well enough with it.

Paper Chaser

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Re: Lets discuss Lowe's stock (LOW)
« Reply #16 on: October 14, 2021, 04:43:19 AM »
I think it's really smart that you checked back in!

It looks like there have only been a few percent of changes since start of the thread, in terms of relative performance among different alternatives. Does that mean all the same costs/benefits are still in place? If so, maybe the exit strategies previous posters suggested are still valid.

It seems like you were expecting bigger outperformance by Lowe's, though there has been a little compared to Home Depot. Do you take this to mean that your expections will be fulfilled next year, or that it's time to revise your expectation?

I don't know that the validity of any of the alternatives listed has changed in any way. They're still on the table. I was a little disappointed to see that I could've earned a bit more by converting to an S&P fund, but I've seen enough positive developments from the stock to hold a bit longer (strong growth in the last year, gaining on largest competitor, general housing market trends, out performed the S&P handily over the last several years as noted). I don't honestly have an expectation for the stock. This is almost considered "play money" now so as long as I see it as roughly equivalent to the market as a whole, with decent chances of outperforming the market from time to time I think it makes sense to hold. Inertia/status quo is a hell of a thing to overcome sometimes.
« Last Edit: October 14, 2021, 05:58:16 AM by Paper Chaser »