'Negative catalyst' ahead for Home Depot, Lowe's: Analyst

Oppenheimer & Co. Managing Director & Senior Analyst Brian Nagel joins Yahoo Finance Live to discuss his decision to downgrade Home Depot (HD) and Lowe's (LOW) based on a cautious near-term outlook, though still bullish long-term. A key catalyst he points to is guidance, as both "essentially missed their guidances throughout '23" and are "likely to take a very conservative tact towards this initial outlook for '24" which could disappoint.

Nagel stresses both companies are "very well run" with strong long-term positioning. However, he believes investors can get "better entry points" in Home Depot and Lowe's that will put investors in a better position to "play the long-term success" of those stocks.

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor's note: This article was written by Angel Smith

Video Transcript

BRAD SMITH: Investors here today, they should be cautious when it comes to home improvement stocks, at least according to our next guest. Oppenheimer is downgrading both Home Depot and Lowe's, warning the upcoming initial 2024 guidance for both companies could prove to be unfavorable catalysts for the shares. Brian Nagel who is the Oppenheimer managing director and senior analyst joins us now.

Great to speak with you. We were all across this yesterday and we broke down to our viewers some of the thesis behind this. But now we've got it straight from, as they would say, the horse's mouth. What ultimately is the kind of catalyst that you would be watching for here among these home improvement companies and retailers?

BRIAN NAGEL: Well, first off, thanks for having me on your show. Look, I mean the near-term catalyst in my view is guidance and I think like you alluded to in your opening. So Home Depot and Lowe's are set to report their fiscal fourth quarter results mid, late February. With those reports, they will introduce initial guidance for '24.

Now my view, I mean, given what is still a soft backdrop, given that both of these companies essentially missed their guidance through '23, I think they're likely to take a very conservative tact towards this initial outlook for '24. And I think that could be a negative catalyst for these stocks given the moves higher and then importantly given the multiples at which they now trade

SEANA SMITH: Brian, what do you think the downside risk looks like here in terms of the pressure that we could see on the stock from the current trading price?

BRIAN NAGEL: Well, look, it's a good question. It's one that's difficult to answer, right? So the way when my team and I published a report yesterday, we did put in the report kind of downside targets for both Home Depot and Lowe's. And essentially, those ranges, if you will, are predicated upon what I call [? trough-ish ?] multiples on cyclically depressed earnings.

Now, to be fair, I mean, those ranges they're down 20% from current levels, OK? What we tell our clients is, look, we don't put a high probability on these stocks hitting those ranges. But if they do, all else the same, that's where you start buying them. So that's basically how we think about it.

Because the other thing to keep in mind here when we're talking about Home Depot and Lowe's, these are very well run companies. They're very well positioned. And over any length of time, the home improvement sector in the United States is quite healthy. So this is very much our downgrade here, our cautious stance is very tactical in nature. We're basically saying, look, you're going to get better entry points in these stocks to play the long-term success.