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3 Reasons Lowe's Companies Stock Could Rise

By Dan Caplinger – Mar 5, 2016 at 11:16AM

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The home improvement retailer has lagged behind its main competitor, but it could still keep doing better.

Image source: Lowe's.

Home-improvement retailer Lowe's Companies (LOW 1.38%) has been a strong performer in its history, delivering 16% average annual returns over the past 30 years. Yet recently, Lowe's has fallen off, declining 5% in the past year and falling well short of rival Home Depot (HD 0.95%) and its 12% gains over the same period. Even though Lowe's hasn't lived up to its potential recently, there are reasons to think that its stock could rebound. Let's take a look at three reasons why Lowe's investors could enjoy stronger returns in 2016.

Don't count the housing market out
Lowe's took a hit after the housing boom of the mid-2000s ended, and its declines during the worst of the financial crisis were sizable. Many investors rightly feared that the impact on housing could cascade into home-related retail. Yet in the years since, the stock has more than tripled after housing got back on an even keel and started expanding more broadly.

Lately, some have started to believe that housing's expansion could come to an end soon. The threat of rising interest rates could make it more expensive for homeowners to borrow using mortgages, and that in turn could slow turnover in the real-estate market and make some renovation and remodeling projects unnecessary.

Yet even though the U.S. economy has improved markedly since the financial crisis, it has never reached its past pace of growth. The Federal Reserve hasn't been aggressive in boosting interest rates quickly, and it's increasingly possible that rate rises will be slow in coming even if improving economic conditions warrant further action from the central bank. That in turn has kept mortgage rates low, and easier financing terms could keep the housing market moving higher for a longer period of time than some now expect.

Lowe's partnerships are paying off
Retail has become a much tougher business lately. One way that Lowe's has fought against Home Depot and other rivals is to create partnerships with companies in adjacent industries that can help boost their total business.

For instance, Lowe's has seen good results from the HGTV Home collection of paint, which paint maker Sherwin-Williams (SHW 0.97%) has produced and marketed. Even though Sherwin-Williams has its own retail store chain, the paint maker is working with Lowe's for distribution and sees the value of the combination of the HGTV network and the home-improvement retailer's extensive distribution network. Capturing the power of media to get customers in the door with specific wishes can be a great move for Lowe's to encourage further purchases.

Lowe's is working hard to catch up to Home Depot
Lowe's knows that it has played second fiddle to Home Depot for a long time, but it isn't content with being in second place. New initiatives have set higher expectations for Lowe's investors.

For instance, Lowe's decision in early February to buy Canada's RONA for about $2.3 billion looks to bolster Lowe's international presence while giving it an opportunity to take advantage of a valuable market in the U.S.'s northern neighbor. Some are skeptical that Lowe's will gain traction with the purchase, especially because Home Depot has had difficulty in some of its own international expansion moves. Nevertheless, Lowe's already has a presence in Canada, and so it should be able to evaluate successfully how to make the most of the opportunity.

Moreover, Lowe's has seen its financial results get better. In its most recent quarter, Lowe's reported comparable-store sales growth of 5.2%, and it said it expects a 6% rise in overall revenue for the current fiscal year. Those figures still lag behind Home Depot, but there are signs that Lowe's could be narrowing the gap. In time, Lowe's is setting the stage for a real challenge to Home Depot's dominance.

Lowe's has demonstrated its ability to produce long-term returns for shareholders. Even though it faces some momentary challenges, Lowe's has the staying power to overcome them and reward patient shareholders. If these factors go the company's way, then Lowe's could see some nice share-price gains in the near future.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Home Depot and Sherwin-Williams. 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.

Stocks Mentioned

Home Depot Stock Quote
Home Depot
$327.07 (0.95%) $3.08
Lowe's Companies Stock Quote
Lowe's Companies
$215.48 (1.38%) $2.93
Sherwin-Williams Stock Quote
$251.61 (0.97%) $2.43

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

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