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Why Buying Near All-Time Highs Shouldn't Worry Investors

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Buying stocks trading near all-time highs may seem counterintuitive. Traditional investment guidelines tell investors to buy low and sell high. Yet with the market itself trading within just a few percent of its all-time highs, the old adage of buying low and selling high is outdated.

As investors we need to adapt to the market environment. Instead of buying low and selling high, now we must buy high and sell higher. And the market is showing us that stocks still have plenty of room to run.

Companies continue to report record earnings and revenues. Trillions of economic stimulus have been injected into the economy, with a few more trillion on the way. Household income is on the rise and consumers continue to spend at record levels. The jobs market is healthy as people have gone back to work in the post-pandemic era. GDP in the current fourth quarter is expected to hit nearly 8% according to respected economists.

All of this translates into a recipe for U.S. equities to continue soaring in what could be a multi-year boom that began in March of 2020. So rather than be concerned about high stock prices, instead we should focus on individual company fundamentals and ask ourselves – does this company deserve a spot in our portfolio?

We’re going to delve into two major home improvement retailers that have defied the odds and are benefitting from the home remodeling trend. One of the companies we will analyze is Home Depot, a long-term outperformer that has continually exceeded expectations.

Should investors be concerned about buying Home Depot near all-time highs? Let’s zoom out and see what we can learn from a historical perspective. Starting at the end of the financial crisis back in 2009 and ending in December 2016, Home Depot stock experienced a total cumulative return of over 683%. That’s an annualized return of 29.54% - healthily outpacing the market over this time period.

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Zacks Investment Research

Image Source: Zacks Investment Research

Cautious investors may have decided that this rate of return was unlikely to continue into the future. But investors who truly understood the company fundamentals and played the long game were rewarded as we can see below.

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Zacks Investment Research

Image Source: Zacks Investment Research

HD stock advanced another 237% over the past five years - a total annualized return of 27.75% for this timeframe. Clearly, buying a solid company at or near all-time highs doesn’t necessarily need to be a cause for concern.

Moral of the story – don’t let higher prices and worries about the future dictate your trading decisions. Stick with companies that have illustrated their ability to outperform, innovate and continuously exceed earnings estimates. That’s what long-term winners do.

The Zacks Building Products – Retail industry group contains the two companies we will discuss below and has handily outperformed the market this year with a return of 51.53%. The industry is ranked in the top 3% of all 254 industry groups.

This industry group also exhibits some favorable characteristics including a relatively undervalued average 14.71 P/E, above-average projected EPS growth (34.47%), and market-beating historical EPS and revenue growth. By focusing on solid companies ranked within the top Zacks industry groups, investors can put themselves in a position to outperform the market.

The Home Depot, Inc. (HD)

The Home Depot is the world’s largest home improvement retailer based on net sales and provides a wide assortment of building materials and home improvement products. Headquartered in Atlanta, GA, Home Depot operates over 2,300 retail stores across the globe and employs more than 500,000 associates.

A Zacks #2 (Buy) stock, HD has one of the most noteworthy records of earnings beats in market history. In fact, since the end of the financial crisis back in 2009, HD has only missed expectations one time – and that was the first quarter of 2020 when the pandemic initially hit and storefronts were forced to shut down. HD most recently reported EPS in November of $3.92, a 14.96% surprise over consensus.

HD stock has advanced 53.5% this year as the company has gained from continued demand for home improvement projects and a robust housing market. HD stock has also benefitted from an average +12.09% earnings beat over the last four quarters.

Home Depot (HD) Price, Consensus and EPS Surprise

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Zacks Investment Research

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Analysts tracking the company are in agreement in terms of earnings revisions, upping their estimates in recent weeks for current year by +6.83%. The Zacks Consensus Estimate for 2021 EPS is $15.49, growing nearly 29% from 2020. After many years of beating expectations, it wouldn’t be too surprising to see HD on track to blow past this estimate when they announce earnings on February 22nd, 2022.

Lowe’s Companies, Inc. (LOW)

Lowe’s has evolved into one of the world’s leading home improvement retailers and has asserted itself as HD’s top competition. Lowe’s offers a suite of products for home maintenance, repair, remodeling and decorating. Based out of Mooresville, NC, Lowe’s provides services to homeowners, renters and commercial business customers.

Similar to HD, LOW is a long-term winner that has demonstrated its ability to outperform over time. LOW is a Zacks #1 Strong Buy stock and has exceeded earnings estimates in each of the last ten quarters. A beneficiary of the home improvement trend, the company most recently reported EPS in November of $2.73, a 17.17% surprise over consensus. LOW has a trailing four-quarter average earnings surprise of 14.28%, supporting the stock’s 60.5% return on the year.

Lowe's Companies (LOW) Price, Consensus and EPS Surprise

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Zacks Investment Research

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What the Zacks Model Reveals

The Zacks Earnings ESP (Expected Surprise Prediction) looks to find companies that have recently seen positive earnings estimate revision activity. This more recent activity can be a better predictor of the future and give investors an advantage heading into earnings season. When combining a Zacks Rank #3 or better with a positive ESP, stocks have produced a positive surprise 70% of the time.

LOW has a positive ESP of +1.07%. Our proprietary model predicts an earnings beat for LOW for the upcoming earnings announcement.

Analysts covering LOW have increased their 2021 EPS estimates by 5.49% in the past 60 days. The Zacks Consensus Estimate for current-year EPS is now $11.91, representing a 34.42% growth rate over 2020. LOW’s next earnings report is scheduled for February 23rd, 2022.

These two well-known home improvement retailers have historically beaten the market. Investors would be wise to add them into the portfolio mix as it doesn’t appear the outperformance is nearing its end anytime soon.


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