Home improvement retailer Home Depot (HD 0.52%) has been a star performer throughout the pandemic because people stuck at home took to sprucing up their humble abodes.
Once the economy began to reopen, the retailer got another boost from the frenzied housing market. Whether it was new or existing homes, historically low lending rates and record-low mortgage rates had consumers out shopping for new digs.
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The National Association of Realtors said the fourth quarter of 2020 saw every single metropolitan area they tracked enjoy gains, with 88% of them witnessing double-digit growth rates.
Because Home Depot makes money from both consumer and professional markets, it was perfectly positioned to capture the swelling demand for housing. Net sales soared 20% last year to $132 billion, generating a 14% rise in net profits.
Home Depot continues to grow in 2021. Its stock is up 25% year to date, raising the question, should investors consider buying the do-it-yourself center's stock in August?
Building a future
While the retailer's future looks bright, prepare for a bumpy ride. It's not Home Depot's fault, but rather widespread macroeconomic fluctuations. However, the company could bear the brunt of any impact.
The housing boom (and the pandemic) caused a massive spike in lumber prices. May saw pricing rise to unprecedented heights, and though they've since tumbled by about 68%, they're still above their historical range. The decline, though, is being brought about by plummeting demand.
Because a piece of lumber that would normally go for just a few dollars was now costing $40, $50, or even as much as $100, it became nearly impossible to build. But things are changing. As housing starts rise, building permits are tumbling in, and sales of new single-family homes in June fell 19.4% below the level of June 2020.
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The most important business
This is going to make Home Depot's business quite lumpy, as the ebb and flow of demand causes the company's position to lurch from peak to trough.
Building materials are Home Depot's biggest segment, accounting for 35% of sales last year, or $46.5 billion. While there are a number of components to the segment, lumber is behind only indoor garden sales and appliances in terms of importance to Home Depot, representing 8.6% of total net sales.
And if home sales will be whipsawed because of dramatically shifting circumstances, that's going to put a crimp into Home Depot's numbers. With appliances accounting for 9% of net sales, appliances and lumber alone represent nearly one-fifth of the home improvement center's business, and likely more when you add in millwork and sundry building materials.
For good times and bad
Yet don't count the DIY center out. If the housing market does tumble, it could upset the broader stock market, which some consider overdue for a correction. While no one knows when that might happen, Home Depot has long been the stock to own at the end of a recession.
Over the last decade -- essentially from the end of the Great Recession until the end of 2020 -- Home Depot's sales have grown 88%, its profits quadrupled, and its stock price rose 818% compared to a 237% rise in the S&P 500.
Home Depot has essentially learned to profit in any market. In a downturn, it helps people maintain and improve their existing homes, and in a bull market it helps them with building and moving into a new dwelling.
That doesn't mean the retailer will rise in a straight line, and some downdrafts might be severe. For example, the unwinding of this pandemic-induced lumber mania may exhibit some sharp pullbacks.
Still, investors should have long-term mindsets. Even with Home Depot's stock price somewhat elevated, they should feel comfortable buying into the business this month.
