2 Growth Stocks That Can Benefit From Rising Home Values
One of the interesting outcomes of the coronavirus pandemic is the surge in housing prices. Folks realized they would be spending a lot more time at home and desired better accommodations. Additionally, remote working increased, and if you didn't need to stay within a certain radius of your company's offices, it created more options for where you could live.
According to the Federal Reserve Bank of St. Louis, home prices rose 19.7% in July from the same month last year. Home prices have been growing by double-digit percentages year over year since December 2020. Two growth stocks that could benefit from this trend are Home Depot (NYSE:HD) and Lowe's (NYSE:LOW). Consumers are typically more interested in home improvement projects when home values are rising.
Home Depot has achieved solid top-line growth over the last decade -- at a compounded annual rate of 6.9%. That accelerated in fiscal 2021 when it was deemed an essential retailer by local governments in North America and allowed to stay open when non-essential businesses had to close. The trend could continue longer with home prices appreciating as quickly as they are.
Here's Home Depot CFO Richard McPhail discussing the relationship between home prices and sales at Home Depot:
You just look at the, we have believed that home price appreciation is a fundamental support of home improvement activity and demand. As your home becomes more valuable, you are more likely to spend more on it. We are at a point now where the housing stock of the United States is over 20% more valuable than it was two years ago, and so as we look forward, not only have we seen that home price appreciation, but the homeowner balance sheet is incredibly healthy. The state of mortgage finance is incredibly healthy, and so that's why some of the reasons why we're optimistic.
Moreover, Home Depot does an excellent job of turning increasing sales into increasing profits. The operating profit margin has expanded for the home improvement retailer from 9.5% to 13.8% over the last decade. In dollar terms, that has resulted in operating income almost tripling from $6.6 billion in fiscal 2012 to $18.3 billion in 2021.
Like Home Depot, Lowe's has been growing revenue at a compounded annual rate of 6.3% in the last 10 years. The same macroeconomic factors helping increase sales for Home Depot are also boosting sales at Lowe's. Both companies serve do-it-yourselfers and professionals looking to complete home improvement projects, so it makes sense to be affected by the same factors.
It's no surprise then that Lowe's CEO Marvin Ellison sees a similar relationship between home values and spending on home improvement:
In fact, there is more housing demand than supply, resulting in home prices continuing to rise. And because of this, consumers have an increased confidence in repairing and remodeling their homes... Further, our research shows that it will take years for the supply of homes to meet the projected demand. This remains a very positive indicator for home improvement. In addition, the customers' mindset regarding their home is very straightforward. As long as their home is increasing in value, they see upgrades and enhancements to their home as an investment and not an expense.
Although not as skilled as Home Depot, Lowe's is adept at converting increasing sales into profits. It, too, nearly tripled operating income from fiscal 2012 to 2021 ($3.3 billion to $9.7 billion), while increasing the operating profit margin from 6.5% to 10.8%.
Overall, if long-standing economic relationships hold, rising home prices should lead to increased sales at Lowe's and Home Depot, boosting profits for both. Therefore, investors looking for growth stocks that can benefit from rising home values can add Home Depot and Lowe's to their portfolios.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.