Home improvement stocks can get good returns despite fading consumer sentiment: Analyst

Real Estate

Investors can expect to see “decent” returns on home improvement stocks despite waning consumer sentiment in housing, analyst Alvaro Lacayo told CNBC on Thursday.

“If you look at the average age of the U.S. housing stock you’re talking about 40 years plus,” the vice president of equity research at G.research said on “Power Lunch.” G.research is a brokerage firm outside New York City.

“And the more time you spend in a house the more you’re likely to reinvest,” Lacayo added. He likes Lowe’s and Fortune Brands, two equities that are down double digits over the past year.

Some analysts think demand could drop this year because a large number of homeowners take on remodeling projects after buying a new property. With fewer homes selling, home values easing, and mortgage rates rising, they predict home renovations could fall to their lowest levels in three years.

That could put a strain on companies such as Home Depot, Lowe’s, Masco and Sherwin-Williams. Earlier this month, the paint maker revealed in a preliminary report that its fourth-quarter sales grew just 2 percent compared with Wall Street’s 5 percent estimate and 2018 earnings would miss expectations.

Lacayo expects the market to soften in the first and fourth quarters of this year as house appreciations fall to as much as 3 percent. However, he still thinks that’s a “fairly healthy level” to support remodeling growth. He also saw positives that Sherwin-Williams and Lennar reported that sales were higher in December than in November.

“Timing when demand will come back from this pause is a little bit challenging, and I think it’ll take at least several months to sort of figure out,” Lacayo said. “You’ll see that come through in the earnings releases as we go forward, that there’ll be a certain amount of uncertainty at least for the first few months.”

Most home improvement stocks are expected to report fourth-quarter earnings next month.

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