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3 Reasons Lowe's Companies Stock Could Fall

By Rick Munarriz - Jan 27, 2016 at 9:00AM

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The home-improvement retailer is doing well, but things could come undone in 2016.

Lowe's (LOW 0.58%) investors have fared well over the years. The stock has closed higher for seven years in a row, riding high on its softer retail approach in hardware and home improvement. 

You won't find too many shareholders complaining, but that doesn't mean that Lowe's impressive streak of annual stock gains won't end in 2016. Let's look at three things that can derail the market darling. 

1. The housing market can become unhinged
It's not a surprise that the last time Lowe's stock closed lower was 2008, when the subprime lending crisis rocked the housing industry.

Lowe's can still hold up reasonably well when there's a lull in the real estate market. Folks who realize that they will be staying in their digs for a while often decide to spruce things up to make a change. However, there's nothing that inspires updates the way that a change of real estate does. A couple moving into a new home is more likely to change out appliances than a family that's been there for five years.

2. Online retail can eat into brick-and-mortar sales
Lowe's and Home Depot (HD -0.49%) are the undisputed champs of home-improvement retail, but it's hard to deny the allure of online retail. Lowe's and Home Depot have strong Internet-based storefronts, but you can never underestimate the specialists.

It's not a surprise that (AMZN -1.85%) and furniture e-tailer Wayfair (W -5.52%) saw their stocks more than double last year. They're doing it right. Lowe's and Home Depot have seen their sales climb 6% higher over the past year, but Amazon and Wayfair are at 18% and 59%, respectively. 

Amazon is making it easier for shoppers to buy home essentials without having to head out to the store. There are tens of millions of subscribers to Amazon Prime, knowing that they will receive their Amazon-warehoused goods in two days at no additional cost. Wayfair has cracked the code for home goods, including patio furniture and other decor items sold at home-improvement stores. 

Amazon initially rocked the media retailers, but after seeing it disrupt office supplies and groceries, it wouldn't be a surprise to see it make a play for the big-ticket items offered at Lowe's. 

3. Interest rates can surge in 2016
It hasn't happened yet, but the Fed has signaled that interest rates are likely to move higher in the near future. Borrowing costs heading north could put the brakes on the red-hot real estate market, but there are two other ways where it can sting Lowe's. 

High-end home improvement projects don't come cheap. Homeowners often need to borrow to redo a bathroom or update a kitchen. If loan rates move higher, it will give potential fixer-uppers less bang for their financed buck. 

The other way that buoyant rates can hurt is that it would put an end to the refinancing boom. The popularity of cash-out refinancing -- where borrowers finance more than the value of their homes for some extra spending money -- has been fueling home-improvement projects. If it's no longer feasible to refinance, it should slow big-ticket orders at Lowe's. 

None of these things might happen. Lowe's could coast to its eighth year in a row of stock gains. However, with the climate starting to change, investors can't get cocky. This will be the year to keep a close eye on Lowe's stock. 

Rick Munarriz has no position in any stocks mentioned. The Motley Fool owns shares of and recommends The Motley Fool recommends Home Depot and Wayfair. 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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Stocks Mentioned

The Home Depot, Inc. Stock Quote
The Home Depot, Inc.
$325.76 (-0.49%) $-1.62
Lowe's Companies, Inc. Stock Quote
Lowe's Companies, Inc.
$215.37 (0.58%) $1.25, Inc. Stock Quote, Inc.
$142.10 (-1.85%) $-2.68
Wayfair Inc. Stock Quote
Wayfair Inc.
$69.48 (-5.52%) $-4.06

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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