What happened

Shares in Stanley Black & Decker (SWK 1.56%) rose 18.9% in January, according to data from S&P Global Market Intelligence. The move comes in line with a greater appetite for risk in the market. The S&P 500 rose 6.2% in the period, and investors warmed to the value proposition at Stanley Black & Decker, a company whose DIY tools sales are challenged by a weakening housing market. 

In addition to the potential for the stock to recover as the company eventually recovers from the slowdown, investors are attracted by the Dividend King's 3.5% dividend yield. Moreover, its collection of highly regarded and well-known brands, ranging from DIY tools such as Craftsman to more professional tools such as DeWalt and Irwin, give it a strong foothold in the marketplace. 

So what

The company undoubtedly has long-term growth potential from introducing new products such as cordless power tools and outdoor electric equipment. Moreover, management has restructured the company by divesting its security and access doors businesses in 2022 and refocusing on tools and outdoor products.

The latter includes the acquisitions of outdoor products businesses MTD and Excel Industries. MTD and Excel make lawn, garden, and turf products and sell through similar sales channels as Stanley's legacy outdoor products. In addition, Stanley has a much smaller industrial segment (it generates almost six times less revenue than tools andoutdoor products), with a heavy weighting toward aerospace and automobiles (fasteners and attachment tools) that should benefit from increased airplane and light vehicle production. Meanwhile, the company plans to cut costs by a whopping $2 billion by 2025.

Now what

The challenge in 2023 is reducing its bloated inventory while maintaining pricing in a declining sales volume market. That's no easy task, and investors shouldn't underestimate the potential for bad news over the near term. A sign of how quickly things can deteriorate comes from management's assertion, made last July, that the company could hit $7 in EPS in 2023. Fast-forward to the latest earnings report, and management is now talking about $5 in 2024.

Clearly, the company's turnaround will take time, and investors buying in must be patient while keeping a watchful eye on the housing market. In reality, it's the ability to reduce inventory and generate cash flow in 2023, dependent on the sales environment, which largely depends on housing market sentiment. Something to consider.