Shares of home improvement giants Home Depot (NYSE:HD) and Lowe’s Companies (NYSE:LOW) each fell about 1.5% in pre-open trading Tuesday after analysts at Telsey Advisory Group downgraded the stocks.
Telsey analysts downgraded both stocks to Market Perform from Outperform.
The analysts said in the near term they expect both companies to "experience a slightly steeper slowdown related to the weak housing market trends, consumers remaining cautious with spending, especially on big ticket items and projects, and continued normalization from the strong COVID-19 and government stimulus related gains from past three years." This will result in lower estimates.
They added that although the stocks have likely factored in much of the negative news and a difficult operating environment, including a stabilizing housing market, they don't anticipate them to surpass the market in the short term due to their strong performances since May 2023.
Home Depot's stock is up about 17% and Lowe's is up about 12% since May 16, 2023. He further highlights that both stocks significantly outperformed the S&P 500 from 2019-2022 driven by superior EPS growth. Home Depot's stock rose 63% during that timeframe and Lowe's stock rose 141% versus 35% for the S&P 500. Now the stocks may have a hard time maintaining the outperformance in the near term, given that the firm's estimates call for 2023 EPS to decline 11% for Home Depot and 4% for Lowe's, before rising again next year.
Although the analysts continue to believe that both companies should remain share gainers and winners in retail in the long term, they are moving to the sidelines for now.
While cutting the ratings, the analysts maintained the $315 price target on Home Depot and $225 price target on Lowe's.