By Julia Carpenter 

Home-improvement stocks have been on the rise. As the pandemic keeps many Americans in their houses and apartments -- using their living spaces as home offices, gyms and art studios -- more are interested in upgrading their spaces.

Another strong round of earnings from Home Depot Inc. and other home stocks is indicative of the trend. As of Friday, shares of Home Depot are up 29.7% since the start of the year, and shares of Lowe's Cos. are up 35% in the same period. The S&P 500 is up 5.1% in the same period.

"I've been in this space for 17 years, and this environment is not one I've seen before," said Seth Basham, specialty retail analyst at Wedbush Securities. "I think we'll see this trend persist into 2021, the longer Covid persists as a problem. The stock will just continue to skyrocket."

While these stocks aren't getting upgraded, many have already bet on home-improvement stocks and are watching the trend with interest.

According to Joseph Feldman, senior managing director and assistant director of research at the Telsey Advisory Group, many investors have seen this trend coming. "I have heard a lot of people asking, 'Is this as good as it gets?' " he said. "I am not so sure. I think there is more life for both the sales growth and these stocks."

Home Depot's revenue rose 23% from the year-earlier period to $38.05 billion. Following layoffs of thousands of store workers and cost-cutting this month, Lowe's reported a 30% increase in revenue for the May-to-July quarter. On Friday, Lowe's raised its quarterly cash dividend by 9%, to $0.60 a share.

These companies remain pandemic winners because their stores are deemed "essential" by many municipal governments, which allow them to remain open during coronavirus-prompted shutdowns. Both companies have reported an increase in foot traffic since April, and analysts expect this to continue into the fall months.

"As it relates to growth in the back half of the year, we're still expecting strong growth relative to pre-pandemic levels, but we do expect a bit of moderation compared to this 'peak trend' level, so to speak, that we've seen in recent months," Mr. Basham said.

"These trends have legs, and as I mentioned before, the longer we see people nesting, the more ingrained the shopping behavior is and the willingness and desire to improve and upgrade the home is, even as we move into 2021," he added.

Home-improvement and furnishing companies with strong online presences are especially well-positioned right now when people are hesitant to enter public spaces.

Wayfair Inc. and Overstock.com have seen growth in sales since the start of the year. Shares of Wayfair have more than tripled, up nearly 277% since the end of 2019.

The biggest driver to home-improvement stock success was homeowners looking for projects they can do themselves. Mr. Basham pointed out Home Depot and Lowe's have in this time acquired lots of new customers who now have greater confidence in their ability to take on home renovation, remodeling and smaller improvements. Analysts expect this to continue, as people remain mindful of social distancing and health guidelines that limit interactions with strangers and groups.

Mr. Basham said he has historically looked at home sales and housing prices when it comes to home stocks. But now, he points to the massive shift in consumer-spending trends. The continued success of these home stocks reflects a broader trend in pandemic-era consumer spending, as people cut spending in some areas, such as travel and dining, to reallocate those dollars to groceries and home upgrades.

Investors are betting companies will continue to allow their employees to work from home for the remainder of 2020. Some may see home upgrades as an investment in their home value, said Scot Ciccarelli, retail analyst at RBC Capital Markets.

" 'The home is your castle again' is something I've been saying a lot," Mr. Ciccarelli said. "You see a contractor in front of your neighbor's house, and then in lockdown, you see all the warts in your home. You know, there's only so much Netflix you can watch."

Write to Julia Carpenter at Julia.Carpenter@wsj.com

 

(END) Dow Jones Newswires

August 21, 2020 17:55 ET (21:55 GMT)

Copyright (c) 2020 Dow Jones & Company, Inc.
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