We started buying Home Depot stock last week as an investment in real estate and interest rates. Our initial purchase of 50 shares was priced at approximately $362. We bought another 50 shares on Wednesday for a few dollars. The Dow has had a mixed performance this year – up about 7%, while the S&P 500 is up more than 16%. In March, the market expected that the Federal Reserve would cut interest rates as many as six times this year. After Home Depot’s stock price rebounded to $395 in March, as investors lowered their expectations again, in May, Home Depot’s stock price It fell to $325 at one point. Home Depot has finally started to get back up and running over the past few months after a string of weak inflation numbers and resilient economic data sent bond yields tumbling. Still, the stock is well below its all-time high closing price of $415 per share in late 2021, when everyone was nesting in the midst of the coronavirus pandemic. The peak was reached just months before the Federal Reserve began a rate hike cycle in March 2022 to combat rising inflation. With the Fed widely expected to cut interest rates at its upcoming September meeting, we like to invest in quality companies such as Home Depot that have been suppressed in the high interest rate environment but whose industries will benefit as borrowing costs fall. improved. Our Home Depot investment thesis is about the recovery in home closings, which is a key driver of sales for the home improvement retailer. In previous cycles, the mortgage rate range where you’d typically see big increases in turnover was around 5% to 6.5%. The next cycle should be no different. “We’ve seen some evidence of a pickup in mortgage activity below the 6.5% level,” Chief Executive Ted Decker said on the company’s second-quarter earnings call in August. He explained that when interest rates dropped below 6.5% late last year, there was an immediate increase in housing activity, mortgage applications and mortgage refinance applications. HD YTD mountain Home Depot YTD So where are we today? Mortgage rates fell for the sixth consecutive week last week, falling from 6.43% to 6.29%. And, what did we see? Total mortgage demand increased 1.4% weekly, with refinancing applications rising 1%. That’s not a lot of activity, but it shows that trends are moving in the right direction. Mortgage rates remain at the upper end of those ranges. People are waiting for a bigger drop. We may not be that far away. 5% mortgage rates may be on the horizon, at least that’s what Toll Brothers CEO Doug Yearley thinks. He told CNBC’s “Squawk on the Street” on Wednesday that if the Fed cuts interest rates three times in the fall, 30-year fixed-rate mortgage rates could fall below 6%. Once mortgage rates hit 5%, the housing market took off. To be sure, falling mortgage rates won’t improve Home Depot’s business overnight. There’s usually a lag effect of a few months because it takes time to close on the home and then figure out what projects you want to do. If Yealy is right, though, it won’t be long before mortgage rates hit a sweet spot, home sales really start to pick up, and now is the time to start shopping at Home Depot. The current hit to the retail industry is that U.S. consumers are in a precarious position, but the housing market is a different story, as rising home prices tend to drive Home Depot sales. As Decker pointed out at an investor conference last week, home equity values ​​have risen by nearly $18 trillion since the end of 2019, while HELOCs (home equity lines of credit) have about $11 trillion in available equity. With numbers like these, it’s easy to see why Decker is optimistic that economic activity will return to normal and that housing turnover and remodeling activity will pick up again. For now, though, Home Depot still expects comparable sales to decline, and Wall Street doesn’t expect a return to growth until the middle of next year. But we want to get ahead of the turning point. It’s a similar situation we’re currently seeing with club name Best Buy, which is now reporting big gains in back-to-back quarterly reports and is expected to return to annual sales growth. One question you might ask is why Home Depot is better than its main competitor, Lowe’s. We think both stocks could play into this thesis, but we like Home Depot because it has more exposure to professional customers and less exposure to self-service shoppers. Earlier this year, Home Depot strengthened its specialty business by acquiring SRS Distribution for more than $18.25 billion. Management believes the deal increases its total addressable market by $50 billion to $1 trillion. Another reason we buy Home Depot stock: Lower interest rates should make dividend growth stocks like Home Depot more attractive to income-hungry investors. The stock currently offers a dividend yield of nearly 2.4%, which is also rewarding us while we wait for mortgage rates to drop. The company has historically been an active buyer of its own stock, but buybacks were suspended until 2026 as it funded the SRS acquisition through a $10 billion bond issue. We have a price target of $420 per share and a Buy rating of 1. (Jim Cramer’s Charitable Trust is long HD, BBY. See here for a complete list of stocks.) As a subscriber to Jim Cramer’s CNBC Investing Club, You will receive trade alerts before Jim Cramer trades. Jim waits 45 minutes after sending a trade alert before buying or selling stocks in his charitable trust portfolio. If Jim talked about a stock on CNBC TV, he would wait 72 hours after issuing a trade alert before executing the trade. 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Why we started taking a housing-related position and where we’re headed with this stock | Real Time Headlines
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