The bull market continues to grow. 3 Reasons to Buy Home Depot Stock Like There’s No Tomorrow

Home Depot (HD -0.94%) is one of the best-performing stocks of all time, and today still retains impressive competitive advantages.

It is the largest company in the massive home improvement retail industry, which has a total addressable market of nearly $1 trillion. In essence, it operates a duopoly with its rival Lowe’senabling both companies to achieve wide operating margins and returns on invested capital.

Home Depot has generally struggled since the height of the pandemic because the housing market has been sluggish and the company’s business is closely tied to home sales and renovation projects. However, this sets the stock up for a rebound in the coming years as the housing market should rebound. Let’s take a look at three reasons to buy stocks right now.

Image source: Home Depot.

1. Housing recovery is coming

After the pandemic-fueled housing boom faded, interest rates rose and home sales fell, leading to a slowdown in Home Depot’s business.

However, the Federal Reserve began its interest rate cut cycle with a 50 basis point cut last month. Although mortgage rates have yet to respond, they should fall as the Fed expects to cut rates by another 1.5 percentage points by the end of next year.

Existing home sales are also about 30% lower than they were before the pandemic started, meaning there is plenty of room for recovery in the housing market. As existing home sales rebound, Home Depot will likely see accelerated growth.

Additionally, there is a housing shortage in the US, estimated to be in the millions, and both presidential candidates have plans to fill that void. As the balance of supply and demand in the domestic housing market normalizes, Home Depot also figures to be a winner.

2. Equity levels are at record levels

While home sales have been slow, prices have risen. More Americans are staying in their homes longer, which has meant record levels of home equity. Americans now have more than $32 trillion in home equity, and it will be easier for them to tap into that as interest rates on home loans and lines of credit fall. The average borrower now has around $214,000 in equity, and that money is likely to drive spending on home improvement projects.

Similarly, with the stock market at all-time highs, this is another source of money that Americans can put toward such projects.

Together, these developments should complement the housing recovery and lead to potential upside for Home Depot stock.

3. Its competitive advantage is strong

Home Depot’s sales have fallen recently, with comparable sales falling 3.3% in its fiscal second quarter (ended July 28). The company is calling for a comparable sales decline of 3% to 4% for the full year.

Despite top-line weakness, Home Depot’s margins remain strong. The company is on track to post an operating margin of 13.5% to 13.6% in fiscal 2024. While that’s down from recent highs, Home Depot is well-positioned to expand its profitability in a recovery .

These numbers should also reassure investors that the company can weather any challenges or headwinds that arise in the industry.

Why Home Depot is a buy

Home Depot’s valuation may not look attractive right now at a price-earnings ratio of 27, but there is plenty of leverage in the business once it returns to growth. In addition, the acquisition of SRS Distribution should start to pay off and help the company better enter the professional market.

Home Depot is a proven winner with a broad economic moat, and the company is poised to capitalize on the housing recovery and efforts to address the U.S. housing shortage.