Lowe’s Companies, Inc. (ticker: LOW) investors are optimistic that the imminent CEO change the company announced earlier this week will put the company back on the right track after years of underperforming rival Home Depot, Inc. ( HD). While investors await the announcement of CEO Robert Niblock’s replacement, Lowe’s biggest bullish catalyst may be its bearish investor sentiment.
According to Bank of America analyst Elizabeth Suzuki, active institutional fund managers are extremely underweight hardline retail stocks at the moment, and Lowe’s is no exception. Suzuki’s latest checks on active manager holdings revealed active managers are currently 22 percent underweight on Lowe’s, leaving plenty of room for buying. At the same time, active managers are 32 percent overweight Home Depot stock, and Suzuki says there’s a possibility of some major rebalancing between the two holdings.
[See: 7 of the Best Stocks to Buy for 2018.]
Home Depot has consistently reported same-store sales growth well ahead of Lowe’s in recent years, and that outperformance has been reflected in the stock market as well. In the past three years, Home Depot shares are up 56.4 percent, while Lowe’s stock is up just 18.9 percent.
“We prefer LOW given it trades at a 2.5 times [price-earnings ratio] discount to HD and has more room to improve operating performance, especially with the recent involvement of an activist shareholder [D.E. Shaw], three new board members put in place in March and a new CEO to be announced,” Suzuki says.
“With a backdrop of a favorable housing market and limited exposure to trade protectionism, we expect LOW to outperform over the near-to-medium term as it takes steps to improve the performance of its U.S. stores.”
CFRA analyst Victor Ahluwalia says Lowe’s balance sheet and free cash flow are also appealing.
“With a favorable economic backdrop and increased employment, more remodeling and housing activity in 2018 is likely,” Ahluwalia says. “We expect LOW to get dual benefit from tax reform as it expands revenue from increased consumer activity and saves on its effective tax rate.”
[Read: 5 of the Best Stocks to Buy for April.]
Bank of America has a “buy” rating and $105 price target for Lowe’s. CFRA has a “buy” rating and $102 target for LOW stock.
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Negative Sentiment May Be Positive for Lowe’s Companies, Inc. (LOW) originally appeared on usnews.com
