Hedgeye turned cautious on the home improvement retailer sector on Friday as it looks at the setup for 2023.
Analyst Brian McGough called Home Depot (NYSE:HD), Lowe’s (NYSE:LOW), and Floor & Decor (NYSE:FND) top short ideas.
“We think the market is dramatically underestimating the demand and earnings risk in this space over the next 12 months. Home builder sentiment index just saw the worst rate of change result ever in October. TGT just flagged how the middle American consumer has significantly curbed discretionary spending over the last 4 or 5 weeks.”
McGough argued that the biggest sector risk relative to the ‘numbers look fine’ bull case of the last few weeks is the unprecedented speed at which the housing data is getting worse. He noted that home turnover, home prices, consumer discretionary spending, and lumber prices are all slowing in an alarming trend for home improvement players.
Despite those economic indications of a slowdown, McGough pointed out that the market revalued home improvement stocks higher on recently reported inflation numbers that raised hopes of a rapid Fed pivot. A scenario which Hedgeye questions will play out to plan.
Compare growth, profitability, and valuation metrics on HD, LOW, and FND side by side.
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