Home improvement stocks: Analyst foresees 'renovation renaissance'

Lowe's (LOW) and Home Depot (HD) have received Buy ratings from Mizuho analysts, as demand in the housing market starts to recover. Mizuho Americas Director and Senior Analyst David Bellinger joins Yahoo Finance Live to discuss this move, expressing his expectation for "a renovation renaissance" in the coming years.

Bellinger highlights Lowe's as the "top pick" due to its strong positioning in the do-it-yourself (DIY) segment. Bellinger explains that when homeowners first purchase a house, they are often engaged in a flurry of home improvement projects for the next two to three years. With Lowe's outperforming in key DIY categories such as paint, outdoor, and patio, he states that the company has "a leg-up" in capturing this demand.

While acknowledging the recent "freeze on housing activity," Bellinger notes that "there is a lot of demand out there" from potential homebuyers seeking to enter the market. He also emphasizes that long-term home improvement dynamics remain robust, with nearly 50% of the housing stock in the United States being "aged 40 or older." Bellinger describes these older homes as "leaky buckets," foreshadowing the need for ongoing maintenance— furthering his bullish outlook on home improvement stocks.

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 Angel Smith

Video Transcript

SEANA SMITTH: The US housing market seeing some bright spots housing starts in February rising nearly 11% well above January's revised estimate with builders benefiting from low inventory and also from mortgage rates softening just a bit. Well, as we head into a pivotal season for home buying analysts remaining largely bullish on home improvement stocks. Mizuho initiating coverage on both Lowe's and Home Depot with buy ratings, naming Lowe's a top pick.

For more on this, we want to bring in David Bellinger. He is Mizuho Americas director and senior analyst. It's great to have you here. So let's start with Lowe's being a top pick within your coverage base right now. What is it about Lowe's that you think better positions that name versus Home Depot, which you also see upside with?

DAVID BELLINGER: Good Morning and thanks for having me on. So yes, we do like the home improvement space. We are beginning to see some green shoots in these housing numbers. Somewhat better housing activity. But we step back and look at Lowe's versus Home Depot, we clearly like both names. But we prefer Lowe's as our top pick within our consumer hardlines coverage and our top pick overall.

What we like here most especially for Lowe's is that they've got this bigger do it yourself piece of the business. It's about 75% of sales. Home Depot is at about 50%. And we think that gives Lowe's better leverage to any early turns in existing home sales. So any homeowner knows once you buy a house, you're typically in these stores every weekend, two or three years constantly fixing projects.

So Lowe's overindexes in those categories like paint, outdoor, patio, seasonal categories. So we think that gives Lowe's a bit of a leg up. We expect Comp sales to turn positive towards the back half of this year.

BRAD SMITH: If we don't see what has been dubbed as the-- I think, silver tsunami where there's a wave of baby Boomer homeowners that don't list their properties because they want to just sit on that for a little longer and wait for the environment to emerge where they're seeing multiple and dozens of bids start to come in on a property. If we don't see that come forward, what does that then mean for the amount of buyers that may say, you know what?

I'll just go look for a potential new home build out instead and how that could translate through to Home Depot and Lowe's.

DAVID BELLINGER: Yeah, good question. And there's no doubt there's been a freeze on housing activity over the past 12 to 24 months. And I think the homeowner or the potential homeowner is looking to get in at a good price. And whether that's existing home sales, new home sales, I think there's a lot of demand out there. We looked at a lot of data. We looked at Google Trends data. And it seems like demand for housing is almost at peak 2021 type levels.

So we think there's a lot of demand on the sidelines ready to be unlocked if we get lower rates that's a nice added accelerant. But if we also look at just the longer term demand dynamics for home improvement, one key stat about 50% of the US housing stock right now is aged 40 or older. And these homes tend to be leaky buckets. There's always some maintenance activity you have to put in place. And we projected this number out over the next several decades.

And that 50% is steadily moving up towards about 65% by 2050. So you've got a long tailwind of just older houses, potential remodeling activity. And we do see a potential for this renovation renaissance or renovation boom coming over the next several decades. And Home Depot and Lowe's, they're positioning their businesses for this. They're going after the big complex pro. And that will lead them to have, what I view as a pretty elevated sales base for years and years to come.