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Oppenheimer downgrades Home Depot, Lowe’s on a ‘post-pandemic reset’ in home improvement retail

On Friday, Oppenheimer downgraded both Home Depot and Lowe’s to perform from outperform and lowered their price targets marginally. The firm disclosed that it still finds both companies favorable in the intermediate to longer-term stance, as shifts in consumer demands in the real estate and home improvement space are going to continue to fluctuate. Yahoo Finance’s Final Round panel break down the firm’s call and discuss the details.

Video Transcript

MYLES UDLAND: All right, welcome back to The Final Round here on Yahoo Finance. Time now for our call of the day. And today, we're talking about Oppenheimer's latest shares of Home Depot and Lowe's, the firm downgrading both stocks to perform from-- outperform. So overall, basically, kind of, I guess, pulling back maybe on these two names and saying that the boom we saw in the home improvement space during the early part of the pandemic is likely to cool or at least create some sort of challenge for these businesses, you know, in the months ahead.

And I think it's interesting to see this call Seana in the context of maybe some of the tech analysts, who we've talked about a lot, continuing to chase stocks higher or to try to back into why some, you know, pie in the sky valuation actually makes sense. And here we have an analyst saying, yeah, look, a lot of great things about home building, great trends going forward. But the rush that we saw into these kinds of names and into their business through June and July they don't see as quite as durable and quite as convincing, at least over the near-term.

SEANA SMITH: Yeah, Myles, because of that, because of that theory, because of their reasons as to why they're making this call, I think a lot of it makes sense. Because once you see these COVID, stay-at-home plays begin to fall out of favor, which Lowe's and Home Depot obviously are, we're going to see some weakness in these stocks, in some sense bottoming.

Back in March, Home Depot jumping over 70%, and Lowe's more than 140%. So I don't think this is a crazy call that we could see these names pullback a bit. And a couple of things to point out, in this note, Oppenheimer saying that their comp sales growth, obviously, is probably going to decline over the next couple of quarters.

Because their most recent quarter, the numbers were almost out of this world when you take a look at some of the growth that they saw. Lowe's reporting website sales soaring 135%, same store sales growing 35%. So those, of course, are two numbers that would be extremely hard for any company to replicate quarter over quarter.

Remember, that these are two stocks, and we've talked about this time and time again here on the show. But they benefited from the work-from-home, the quarantine play over the last several months. People finally getting around to some of those repair projects that they had been putting off for months, investing in home renovations. Because they weren't spending their money elsewhere.

They weren't going anywhere on trips. They weren't dining out. So they had a little bit extra cash that they were then allocating to some of their home renovations. And also just gardening and being outside, we know on just a seasonal basis those spring and warmer months are typically the busiest time and the best time for Home Depot and for Lowe's.

Though on the seasonality basis, this call also makes sense that we will see a little bit of a pullback over the next couple of months or the next couple of quarters. So when you take all of that into account, I think the Oppenheimer is probably right. While also though maintaining the fact that the longer term outlook, it still looks like a pretty strong play, especially from the e-commerce perspective that I was talking about, the over 130% jump that Lowe's posted last quarter.

These two companies are clearly making the right moves from a retailer perspective. They're expanding their presence in the e-commerce division, which is so important in order to stay alive and to do well in this type of environment. So we might see a bit of a pullback in the short term. But I think longer term, and Oppenheimer makes this argument, these are two very strong plays.

- Guys, there are two interesting notes here to point out in terms of softening a little bit the outlook for these two companies. First of all, a week ago we got the forbearance numbers, right. So that is Americans who have had their mortgages extended are now in a program giving them a little bit of relief on their payments. The forbearances came down by about 26,000.

But we've still got almost 4 million Americans who are in that kind of a plan. And obviously, that's going to put a further crimp on the housing market. It also means those people who need further emergency help right now with their mortgages and, by the way, even though the number of forbearances came down, the number of people getting basically bailouts, emergency loans from banks for their mortgages to extend the payment plan went up.

So obviously, those are not people who are going to be doing home improvement projects right now. I mean, if you're struggling because of the pandemic to pay your mortgage plan, you are not going to Home Depot and Lowe's to do home improvement. That's number one, just something to think about. Now number two, what this note really is, as Myles alluded to, is another note in the following vein.

And we've talked about a Peloton note like this. We talked about a Zoom note like this. The idea that the benefit and the recent bump, we've seen it come. And that's it. We are beyond the bump, right. The bump was a pandemic thing. And that's the end of it. And even if there's continued growth, no way can it surge at the same levels.

And I think it actually is a better argument when it comes to Home Depot and Lowe's than it was for Peloton. Remember, analysts at first said, I think it's a pull forward in demand. And sure a lot of people are ordering Peloton bikes now. But when the pandemics over, will they be? And I think about a week ago, we revised that theory, didn't we? We said, I think they will continue to order Peloton bikes, even after the pandemic.

But for Home Depot and Lowe's, I actually find it convincing, the argument that all those many people who were doing home improvement projects amid the pandemic, they've probably done them now. And they're done, for awhile.

MYLES UDLAND: Yeah, there's all kinds of different decisions that people can make during a pandemic. And I think saying I'm now a big ride my bike at home guy and that's just what I do is a very different one than, oh, I'm going to put a new deck on. And it's going to cost tens of thousands of dollars. And, you know, it's a huge pain in the butt to maintain every year.

Or I'm going to move when I hadn't planned previously, all those kinds of things, right. There's different extremes on new behaviors because of the pandemic. And I think that, you know, Home Depot and Lowe's are part of the basket that, you know, as you get seven, eight months in, people look at and say, yeah, I mean, OK. We did the one project. I'm not sure we're going to continue with all the rest of the six now that, you know, things are kind of going back to normal.

So, again, stocks have had incredible runs. Oppenheimer still likes these names, Home Depot and Lowe's, over the long term. But that pandemic bump likely done for now. All right. Coming up on the other side of this break, we're going to talk about what you need to know for your retirement, as we head towards the end of the third quarter and wrap up 2020 here. We're back with more on that in just two minutes.