Home Depot, Lowe's downgraded on inflation woes

Oppenheimer downgraded both Home Depot (HD) and Lowe's (LOW) from "Outperform" to "Perform", lowering Home Depot's price target to $345 from $360, and Lowe's price target to $230 from $275. Seaport Global also cut its rating on D.R. Horton (DHI) from "Buy" to "Neutral". The firms are citing caution on consumer spending habits among continued inflation as reasons for the downgrades.

Yahoo Finance Anchors Brad Smith and Seana Smith break down the latest developments for these stocks and what it means for the home improvement sector moving forward.

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Nicholas Jacobino

Video Transcript

[AUDIO LOGO]

BRAD SMITH: Welcome back, everyone. We're taking a look at home builders this morning after a series of downgrades from firms on several stocks. Oppenheimer, downgrading both Home Depot and Lowe's to perform from outperform, and slashing price targets on both stocks, while Seaport Global is cutting its rating on DR Horton to neutral from buy.

The firms are citing worries about consumer trends for the rest of the year as persistently high inflation continues to hit people's wallets. There are a few things to break down here within this. First, let's start with Home Depot and Lowe's as you've got that pulled up on your screen here.

And diving into what Oppenheimer has been saying about specifically Home Depot and Lowe's and this unfavorable guidance that they're giving. They, essentially think that there is complacent positioning within the market. And then, that's going to hit on both of these names here. Notably, threading some of these shorter-term market-positioning towards Home Depot and Lowe's.

Turning to complacent, shares might not discount adequately for potential, persistent, fundamental weakness at the chains here in earlier fiscal year of 2024 is what they said.

SEANA SMITH: Yeah, I think a lot of this just points back to some of the common themes or ongoing themes, I should say, that we've been talking about in the market, right? We certainly have seen a slowdown in housing activity. And also, we're in an environment of elevated rates.

Two scenarios and two trends that would point to softness, likely, here for names like Home Depot and names like Lowe's. And we certainly are seeing that case being made here from Oppenheimer. And, Nagel went on to say that he does not envision a market in restrengthening and demand trends within the space until later 2024 at the earliest.

So this is a rebound or a recovery that he is basically saying that he wouldn't be shocked if we don't see until 2025. Again, a lot of that because of the elevated rate environment that we are currently in. And going back, even tying into comments that we just heard from Octavio, talking about the fact that, hey, it wouldn't be unheard of for the Fed to continue to delay that first rate cut.

Certainly, the market is not as optimistic as it was-- that we were going to get that March rate cut. If we don't get it in March, it's not necessarily that we're going to get it in the first half of the year. And maybe not even at that first meeting in the second half of the year when you look ahead to July.

So the fact that we could see a further delay in rate cuts here could put pressure on names like Home Depot and Lowe's, especially, given this investment thesis here from Brian Nagel.

BRAD SMITH: Yeah, it's amazingly critical to continue to track the backlog for a lot of these home builders that are out there. And what that means for their relationship for large purchases that could come into Lowe's-- come into Home Depot--

As Lawrence Yun, who is the Chief Economist over at the National Association of Realtors reminded us last year, that we are still trying to add in more supply to the markets to actually make sure that there are enough homes that are out there to quell some of the demand that we've seen. And we spoke with him on the back of some of the existing home sales figures that came out-- showing that mortgage rates are meaningfully lower compared to just two months ago.

More inventory expected to appear on the market in upcoming months here as well in the existing home side. And we'll see on that new home side and how that affects some of the home-adjacent stocks here.

SEANA SMITH: Yeah, certainly, important for investors to keep in mind as they're planning out their portfolio.