NEW YORK (AP) -- The housing market is finally rebounding — so it's time to downgrade home improvement retailers, an analyst postulated Thursday, and downgraded Home Depot and Lowe's to "Hold" from "Buy."
Even though both companies report earnings next week, Stifel Nicholas analyst David Schick said the downgrade is not related to fourth quarter earnings, but based on a potential "leveling off" of housing market sector improvement and his view that the stocks are fairly valued.
He said he expects strong results for the duo in the fourth quarter based on the housing market improvement and Superstorm Sandy rebuilding. He expects remodeling is picking up too and appliance sales will remain strong.
But the time for the downgrade its right, he said, because it's possible the fastest growth in the market rebound is behind and growth, which is still expected to be positive, will slow for the rest of the rebound.
"It's a subtle and therefore difficult call as we remain directionally positive on the housing market," he said.
He downgraded Home Depot to "Hold" from "Buy" and kept his $69 price target on the stock. He also downgraded Lowe's to "Hold" from "Buy" but kept his $37 price target on the stock.
The housing sector itself has had a mixed week, showing that the recovery may be unpredictable.
The National Association of Home Builders said Tuesday that confidence among U.S. homebuilders slipped in February from a 6 1/2-year high in January.
The Commerce Department said Wednesday that U.S. homebuilders began work at a slower pace in January than in December, just the second drop in construction in the past six months. But the pace of home construction in January was the third-highest since 2008 and was evidence of continued strengthening in residential real estate.
And The National Association of Realtors said Thursday that sales of previously occupied homes rose in January to the second-highest level in three years.
Shares of Home Depot Inc. fell $1.70 to $64.74 in afternoon trading. Shares of Lowe's fell 83 cents to $37.81.