The Dow Gains as Homebuilders Soar, But Home Depot Gets Left Behind

The housing market continues to show signs of life, but Dow component Home Depot didn't benefit as much as homebuilding stocks.

Jun 24, 2014 at 12:30PM
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The Dow Jones Industrials (DJINDICES:^DJI) were up a modest 10 points as of 12:30 p.m. EDT. News that The Conference Board's Consumer Confidence Index reached its highest level in almost six and a half years bolstered investor sentiment, while data on the housing market helped send homebuilders Hovnanian Enterprises (NYSE:HOV)and D.R. Horton (NYSE:DHI) respectively higher by 2.9 and 2.6%, carrying several other peers upward as well. Yet Dow component Home Depot (NYSE:HD) barely inched higher, mostly getting left out of the excitement on the housing front.

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What housing is doing
Two different sets of housing data issued this morning painted slightly different pictures of the health of the market. The S&P Case-Shiller index showed only minimal monthly gains in seasonally adjusted home prices, with the key 20-city index up 0.2% for April. That slowed the rate of growth on a year-over-year basis to just 10.8%, which was somewhat slower than economists had projected. In particular, some of the most popular metropolitan areas have finally started to see growth rates slow from former unsustainable figures. While that might not be good news for those who enjoyed those big gains, it bodes well for those who want to see more stable markets going forward.

What really helped Hovnanian, D.R. Horton, and other homebuilders was news that new home sales soared. Single-family residential sales jumped almost 19% on a monthly basis, with an equally impressive 17% year-over-year gain. The Northeast had a biggest gain, with the West and South regions also posting double-digit percentage spikes as the Midwest lagged.

Homebuilders obviously live and die based on new-home sales, even though they make up only a tiny fraction of housing-market activity throughout the U.S. economy. The hope among shareholders of homebuilder stocks is that strength in the market will spur companies to boost their building activity to provide more supply to the market, especially given the drop in new-home inventories to four and a half months.

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Why Home Depot got left out
Despite the positive news from new-home sales, Home Depot had to deal with other factors today. One Wall Street analyst firm issued a neutral rating on the stock, according it a weighting equal to the rest of the market and putting a $90 price target on shares, which is more than 10% higher than where Home Depot stock trades now.

Home Depot also has more to lose from disparities in the existing-home market versus the new-home market than homebuilders do. In many ways, homebuilders can ignore existing homes, counting on demand for new construction to support their efforts. Home Depot, on the other hand, makes huge amounts of revenue from homeowners seeking to upgrade their current houses, and one primary motivator for their efforts is seeing their projected home prices rise. Having already produced so much growth under tough conditions, it's harder for Home Depot to sustain its pace than it is for homebuilding stocks to recover from greater concerns.

For the Dow Jones Industrials, housing is an important component of construction and industry that affects more than just Home Depot. Even if Home Depot doesn't benefit as much from housing strength as it has in the past, the Dow overall needs housing to do well in order to help support the entire stock market.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Home Depot. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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