Home improvement retailers: Top choices for the retail sector

It has been a big week for the retail sector, with a slew of big box retailers reporting earnings, from Walmart (WMT) to Target (TGT) and Home Depot (HD). The University of Michigan Consumer Sentiment reading was also released this week, its figure coming in lower than expected.

Argus Research Senior Analyst Chris Graja and Washington Crossing Advisors Senior Portfolio Manager Chad Morganlander join Market Domination to give insight into how investors should navigate the retail sector.

Morganlander shares his thoughts on the current strength of the consumer, which he notes is "quite strong": "They've got a lot of tailwind regarding savings. Wage inflation has been going higher — that bodes well for consumption, as well. It's a full employment picture here in the United States, so for us, we think that bodes well overall in aggregate for big box retailers."

Graja who has a Buy rating on both Home Depot and Lowe's (LOW) explains that home improvement retailers are currently well position: "They're good quality businesses. They pay dividends, and the thing is, I don't think we know exactly when the turn is going to be. And the other thing is, like all we need to see is a little bit of sign of an inflection. So I think the long-term thesis makes a lot of sense looking at Harvard's leading indicator of remodeling activity."

For more expert insight and the latest market action, click here to watch this full episode of Market Domination.

This post was written by Nicholas Jacobino

Video transcript

Welcome back.

We're looking at how to navigate the retail sector with today's Yahoo finance investor playbook.

Another big week of earnings season has just wrapped up, but there are still a handful of big box retailers on deck and joining us now to discuss which companies are best positioned as we approach earning earnings releases in the next two weeks is Chris Graha Argus, Research, senior analyst and Chad Morganlander, senior portfolio manager at Russian Crossing Advisors.

Uh Welcome guys both to the show.

Chad, maybe I'll start with you.

Um Maybe the big picture, Chad your take on the consumer and, and where they are right now.

It was just sort of interesting to walk through this earnings season and try to read the tea leaves um just where you thought they were.

Uh so some executives, I I actually was impressed when I heard something like like Uber and Lyft and how generally optimistic they sound the consumer.

But what was your take so broad based?

I think that the consumer is quite strong.

Uh They, well, they, they got a lot of tailwind regarding savings.

Uh wage inflation has been going higher that bodes well for consumption uh as well as a full employment picture here in the United States.

Uh So for us, we think that it bodes well overall in aggregate or big box retailers.

Of course, there are certain retailers that will do much better and then there are others that are going to lapse due in part because of the big post COVID surge.

The normalization cycle is around the corner.

Well, maybe on that front, Chris, I wanna bring you in.

Uh, you know, I think that the Walmarts, the world more squarely fit into our idea of what value the value proposition is right now.

Maybe we struggle a little bit more with the Home Improvement retailers which I know you cover as well.

Talking about Home Depot and Lowe's, I think you have a buy rating on both.

How, how do they fit in into this current consumer environment?

Yeah, I I and I think the multi year strategy is that there is a huge portion of the population who has locked in very low mortgage rates.

Uh, we've seen in the housing numbers that they're not moving.

So maybe a lot of people you also have uh baby boomers who are aging in place and you have a large number of millennials who you know, are going to buy a house.

Uh but it's probably not gonna be the house they dreamed of.

And I think all of that spells Home Improvement, the Baby boomers are gonna upgrade homes so that they, they can stay longer, whether it's showers or baths, um or railings or other things.

Uh A lot of people who are saying, you know, we've got a low mortgage, we're gonna stay in our house.

They're probably gonna do kitchens and bathrooms and all kinds of things to make their existing home more livable.

So, you know, there may be a couple of near term challenges but, but longer term I think, I think it makes a lot of sense.

Well, that's what I wanted to follow up on Chris.

You know what you're describing, that sort of longer term trend?

Are we gonna see that in the upcoming earnings or is that more just something investors should kind of ride out and wait for?

I mean, they, they're good quality businesses, they, they pay dividends.

Um, and the thing is, I don't think we know exactly when the turn is going to be and, and the other thing is like, all we need to see is a little bit of sign of an inflection.

So I think the long term thesis makes a lot of sense.

Looking at the, you know, Harvard's leading indicator of remodeling activity.

It's probably later in the year before we, before we see a turn there.

But I mean, I think it's a thesis that makes a lot of sense and uh I think the businesses are, you know, are going to weather that and if the change whether it's from the Fed or somewhere else happens a little bit earlier.

You know, you're there with good quality businesses rather than chasing Chad.

I want to bring you in here as well.

Get your, your take on Home Depot.

It sounds chad like about that name you're saying, listen, um some short term headwinds but longer term smart place to be.

Right.

And I completely agree with Chris, uh when it comes to Home Depot, uh we own it in our rising dividend portfolio.

We've owned it for over five years.

It it has very little debt.

Uh it is consistently growing and uh when it comes to profitability, it's, it's has a high return on invested capital.

Uh and like Chris, I echo that you want to own this as a core position over the next 3 to 5 years.

When that turn comes in the housing market, uh this stock will gap higher.

Uh So, uh we would be a buyer within that uh within uh uh with, with Home Depot.