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- [00:02]
A
Home Depot and housing on today's Motley Fool Hidden Gems investment. Welcome to Motley Fool Hidden Gems Investing. I'm your host, Tyler Crowe, and today I'm joined by the usual Tuesday crew. I've got Lou Whiteman and Matt Frankel, longtime Fool contributors here today, we're going to get into Home Depot's earnings, which reported before the bell today, as well as take a look at, I would say, like a broader look at the housing industry in general, residential construction, building supply in general, because Home Depot is a great time to expand on this broader world that we see in the housing world because there are trillions of dollars associated with a lot of investing opportunities. And of course, when we finish up, we'll get into the mailbag. But as I said, we're going to start with Home Depot's earnings. Shares are down about 1.37% as we tape. After the company released its first quarter earnings, you know, it beat earnings and revenue estimates were better than expected. Revenue was up 4.8% year over year, but costs outpace that and earnings ended up doing a 4.3% decline on a per share basis. And you know, S P 500 is down today. So you could say, yeah, it's just the market. I guess it's not a big deal. But other than that, guys, what did you see maybe in the earnings or perhaps what you've been watching with Home Depot in general. And what were some of the takeaways? Lou, I want to start with you.
- [01:26]
B
Yeah, so down slightly now, half hour ago, I think it was up 0.1% or so. So I think the market is yawning at this quarter, which if we're honest, that's probably the right reaction and you don't have to overreact every three months. But look, I will tell you, if you squint, if you really, really look carefully, if you really want to see it, there are green shoots there. There is potential signs of life here. And a company that, you know, it's been a bad few years for just in terms of total spend. People are shopping less, but they are spending more. Average ticket increased by 2.2% even as transactions declined by 1.3% and purchases of $1,000 or more were up slightly. Now, look, it could be glass infanti, that's just the impact of inflation versus people actually having an interest in bigger projects. But there's at least a glimmer of hope that we're not just buying petunias for the spring, that we're actually investing in our homes. And doing bigger projects, which we haven't seen before.
- [02:29]
A
Lou, I didn't realize you were a big petunia guy.
- [02:32]
B
You know what, the squirrels like the roots, so you have to be careful with them.
- [02:36]
A
Matt, what did you see when you looked at the earnings?
- [02:39]
C
Yeah, I mean, revenue growth was strong, like you mentioned, but it's also important to note that comparable sales weren't great. Most of the growth was new stores and things like that. Comparable sales were up just 0.4% year over year in the US 0.6% worldwide. And that's after a 55 basis point currency tailwind. So people are still spending money on what they need for their homes. Like Lou mentioned, purchases of $1,000 or more are up slightly. Some people have to spend that and we're deferring maintenance, hoping that interest rates were going to come down. Consumer confidence is low, interest rates remain high. The housing market is still extremely slow and very few homeowners are using their equity to finance projects. This has been going on with Home Depot for the past, I'd say four, three years at a minimum. And until we see significant improvements in home affordability, either in the form of prices coming down or rates coming down, I don't really see much changing here.
- [03:34]
A
I want to pull back the lens a little bit because, you know, pretty looking just at the quarter is pretty short term. Over the past five years though, the shares of the Home Depot are roughly where they were. I think it's maybe like up 7,8% over the past five years compared to a gain of 78% on a total return basis. So that includes dividends for the S&P 500. That level of underperformance, I don't think I've ever seen that or I can at least remember when it comes to Home Depot. I mean, even during like the dot com bust and the Great Recession, Home Depot went down with the rest of the market. This has been one of those times of like divergence in the performance of Home Depot as a business and as a stock. I'm not going to question that Home Depot is a quality business or not. This is the duopoly of home improvement and it's been a wonderful business for going on almost for I think more than 40 years now, at least as a publicly traded company. And there's obviously the argument like it could be the best this is ever going to go and maybe this is just a underperforming stock for here or maybe a short term tailwind or headwind. Excuse me, when it comes to Home Depot, stocks. So I want to ask this, is Home Depot a value investment or in the other term a value trap where it looks cheap but you're probably getting underperformance because it's cheap for a reason?
- [04:56]
C
Yeah, so you correctly mentioned. It has really underperformed the market. But a few things to point out. So number one, Home Depot is trading pretty in line with other what I would call housing adjacent stocks over the past five years or so. If you back out the Mag 7 and certain other aspects of the AI trade, the S&P 500 is not up 78% over the past five years without those parts of the market that have been kind of divergent from everything. And lastly, five years ago, which was May 2021, we were at what I would consider close to the peak of housing euphoria in the US. The average 30 year mortgage rate was about 3%. Prices were rising rapidly, so there was a lot of incentive to sell and buy and sell and buy and refinance. There was a lot of stimulus being injected into the economy. So in short, the fact that Home Depot's flat versus exactly five years ago isn't that terrible considering the environment for housing and interest rates and just consumer confidence now compared to then. So at the current price Home Depot shares are roughly 30% below their high which was reached in late 2024. And you're right Tyler, we don't see this kind of underperformance from Home Depot often before this one. Home Depot has only experienced two 30% drawdowns in the past decade. One was a very quick blip during the initial Covid crash and the other was during that 2022 bear market when interest rates went from 3% to 7% in a year. It's a rare discount. The stock trades for about 20 times forward earnings. It has about a 3.1% dividend yield. some point, I don't know when, at some point the real estate market will become more active. So I like the stock as a
- [06:39]
B
long term investor here, definitely value, not value trap. Basically what he said. Look, I'm going to take the over on how long that recovery is going to take. But the good news is like Matt said, the recovery is not priced in. I don't see any reason to rush in at these levels. I don't think it's like you must buy now. I'm guessing we'll be buying at these levels for a while now. But you get the decent yield, a good solid track record of declining share count. It's not on the top of my list to buy, but it's not a bad choice either.
- [07:09]
A
I wanted to talk Home Depot today and I thought it was like, you know, we could go like one show where we don't mention the word AI once, but Matt had to ring the bell. So we did mention it, unfortunately. So I don't know. Put the timer on eight minutes in, we're talking AI already. To the point about the dividend yield, too. Home Depot's dividend yield, 3.1% is basically the highest it's been since the Great Recession. So keep that in mind when we're, when we're thinking about this as a future investment. Those who are actually looking for income. Coming up after the break, we're going to take this discussion about the housing adjacent stuff that Matt was talking about and take a wider look at what's been going on in the housing market and what investors should be thinking about.
- [07:50]
D
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- [08:23]
A
up at the top, Home Depot's performance as a stock has been indicative of what we've seen across the residential home, the residential construction market, basically anything that isn't tied to commercial and industrial development these days when it comes to construct, and that's been going on for several years now, home sales and renovation rates have ground to a halt. And as Matt said in a previous segment, interest rates do have a big play in that interest rates today are considerably higher than they were during COVID and right after Covid, but it's at a level that is quite staggering. And there's a great real estate blog is by Bill McBride. It's called the Calculated Risk Real Estate. He, he, he puts out this amazing chart on housing starts and it goes back for like almost 40 years. And right now, existing home sales in the United States are basically at the same pace they were during the financial crisis during like 2008, 2010 period or as far back as the early 1990s when basically the United States population was like 90 million fewer people than we have today. And yet home sales are right around that levels. So when I hear that and we talk about interest rates as like the big culprit here. I almost feel like there has to be more to it, right? Like is it just interest rates? Is it consumer sentiment? Like what is driving this unprecedented low in home sales and renovations and all of these things?
- [09:52]
B
So certainly interest rates aren't helping. But look, we are too far into this interest rate cycle. They've been where they are long enough now. Everything normalizes. I believe that. So I don't think we can blame interest rates anymore. Tyler, I think you're right and I don't blame the homebuilders either for those starts number because I as someone who's sort of been poking around for real estate right now, it's amazing the way homebuilders are aggressively discounting their, their, the inventory they have. Why should they be starting more when they're doing that? What I think is going on here, I think you have to step outside of housing to really, really get the explanation. Housing is just one part of a wider aff crisis. I mentioned this on the podcast last Friday. But wealth inequality in the US is currently at levels last seen in the 1920s. It's going to take more than shaving 100 or 200 basis points off the mortgage rate to change people's ability to buy houses. That's just, it's not an interest rate story anymore. We have a tend to focus on housing kind of with blinders on and see it just with moving rates, economic academy, economic activity, just kind of seeing the world through housing and levers. I'm in the slower for longer camp because I think if you look outside of housing, outside of these levers, there are factors driving this slowdown that I don't think interest rates or anything the home builders can do, I don't think there's anything they can do to solve this.
- [11:20]
C
Yeah, I mean it's a few different factors. Some of it was pulled forward demand during COVID like you said. I know a lot of people who bought homes during COVID myself included and some is the fact that consumer sentiment is extremely low right now. Not sure if it's quite at an all time low anymore, but it's pretty close. Interest rates being stubbornly high are certainly not helping, but there are some reasons to be positive going forward. So for example, wage growth in the US is currently outpacing inflation and it's significantly outpacing home price increases. Home prices rose on average about 1.3% in 2025. So affordability could improve even without meaningful changes in interest rates or home prices. So I believe that at some point inflation will be brought under control and gravitate toward the Fed's 2% target and interest rates will come down. Not to the 3% mortgage rates we saw in 2021, but the 5% area is certainly realistic. And doing the math, a 30 year mortgage rate moving from 6.5%, we're roughly where it is now, to 5% is effectively a 15% discount on the principal and interest portion of a mortgage. So it would get many people who are currently stuck in place off the sideline.
- [12:31]
A
I can see that certainly with the wealth equality thing, it's certainly when I think about that, it's like the first time home buyers, I think is a market that has been strained incredibly hard recently. And I don't see that changing a whole lot either. But to Matt's point too, there is this portion of the market move up and people changing houses and things like that where there are also weird signs of optimism. And this actually came because we were talking about Home Depot. I was doing some looking at some previous conference calls and things like that. And this was a quote from Home depot CFO Richard McFall during their like analyst day call back in December. And I'm going to paraphrase a little bit, but basically like since 2019, the value of housing stocks have grown over 60% and home equity values have gotten even bigger because people have been paying down their mortgage. There's basically like $16 trillion worth of home equity that people could tap for various reasons, either to like move up to a new home or to make that renovation that we're talking about. And the average home to loan value, you know, how much like outstanding mortgages people have, it's down at the 27% range. That is I think one of the all time lows because we have a very, very high proportion of home sale or owned homes in the United States that are owned outright, that don't even have a mortgage on them anymore. People who've lived on their entire lives, not sure if they're going to leave. But it's certainly significant in terms of like how we think about the housing market in and with them sitting on, as McFaul said, was like all this dry powder for use. You know, you could make the argument that there is this coiled spring for like renovations and spending and mortgage refinancings in the world of lower interest rates. I know there's other factors involved, but as to Matt's point, like a lowered interest rate would have a significant impact on this in the long run. And so in this scenario where you have this coiled spring of dry powder for renovations for people to make moves in their houses or something like that, thinking about this whole industry in general, what would you as an investor be looking at? Are there companies in particular or is there sectors? What would get you excited on this idea of playing a multi year tailwind for this industry?
- [15:00]
C
Yeah, so the one number I would give to sum up pretty much all of what you just said is $35 trillion. That is the estimated total of all U.S. homeowners equity. That's by far a record high. That's roughly twice what we had going into the COVID pandemic. So I'm looking at companies in the mortgage space for refinancing. Rocket companies is a big investment of mine. They're the number one consumer facing mortgage lender in the U.S. i like companies that specialize in renovation products. Trex is one that's been on my list for a little while now. And I think that that's a, you know, decking is a project that people you often finance with home equity. But I mean, honestly, that $35 trillion number, this is a big enough opportunity that there could be plenty of winners in both the financial sector and in the consumer discretionary sector that produces renovation type products. So there's room for a lot of winners here.
- [15:57]
B
Yeah, I'm much more bullish on the idea that people with homes will invest in their homes than I am bullish on the idea of an uptick in the housing market anytime soon. And it's back to that inequality thing. If we are in this K shaped economy, the haves and the have nots. One of the lessons of the last year is people who can spend, continue to spend. People with houses will continue to invest in their homes. That is different from saying that people will be able to who haven't been able to buy homes will be able to. So I do think, yeah, Home Depot outperforms the home builders for now. I'm honest, to be honest, I'm more interested in Home Depot or Lowe's and something like Trex. I'd rather have broad exposure than anything niche I think right now. But I do think, especially relative to housing, home improvement can work.
- [16:48]
A
Coming up after the break, we're going to take investor questions.
- [16:51]
D
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- [18:18]
A
get your questions answered on air, go ahead and email us@podcastool.com that's podcastsool.com the three rules we've always said so far is 1 keep it foolish, 2 keep it short enough I can read it on air and three we cannot give personalized advice. So try to keep it to asking about an individual stock or what we as investors would do rather than asking for personalized advice. So Lou, Matt and I don't get in trouble with the sec. And guys, I used to listen to a lot of classic rock radio and they always used to do that double Shot Tuesday sort of gimmick. So we're actually going to do two investor questions here because one's relatively short and I think they're probably good general kind of questions here. First one comes from Zach and the question is he wants to know what to do with dividends. Do you let them get automatically reinvested or do you prefer to have more control when they where they go and the timing of when you actually purchase stocks? Zach would like to know a discussion on dividends and all types of investments. A crowd depending on the type of investment account would be really appreciated. Thanks. That's from Zach. So Matt, what do you think? Reinvest or depends where it is, what kind of company? What do you say?
- [19:29]
C
If you asked me a decade ago, my answer would be very different. So to be fair, dividend reinvestment used to be far more valuable than it is today. Until about 10 years ago, fractional shares weren't widely available to trade through pretty much any broker I know, maybe Robinhood. And you had to pay a commission on pretty much every single stock trade you make. At the time I think my commission was 699 a trade even if I was buying one share. So dividend reinvestment allowed you to skip those things. You could buy fractional shares, not pay commissions and have all of your dividends put into new shares to continue to compound. Now that's not an issue. So it's not quite as much of a no brainer as it used to be. So with the account by account thing, so I still have my retirement accounts set to automatically reinvest dividends. That's where most of my dividend stocks are. First of all, like all my real estate investment trusts are pretty much in retirement accounts. It just makes it easier to compound your returns if you want to set your retirement investments on autopilot. On the other hand, in my taxable account I'm generally more actively looking for opportunities. I'm more likely to get into growth stocks. If I have any stocks linked to the AI trade, that's where they are. So I like to let my dividends accumulate for a while and have the ability to put them to work wherever I see the best long term value. So between my two main types of accounts, those are just my preferences.
- [20:48]
B
Yeah, I have no firm rules here. As Matt says, for most stocks a dividend is window dressing. It doesn't really move the needle on your investment. Whether you take the cash and deploy it elsewhere or add it, I will say I'm more thoughtful about it on those handful of stocks where there is a meaningful yield. TFS Financial is one example in my portfolio where you're getting 8%. As long as the yield is that high, I want to reinvest and get more of that return. So I will think that there for the most part, I think the answer here is do what you want, don't overthink it. In terms of the account type, remember you pay taxes on those dividends in a taxable account. Even if they're reinvested, it's still a taxable event. So again, I think for the amount of words written about this, I don't really think it moves the needle for an investor. So just do what feels right for you.
- [21:41]
A
There's like hundreds of like investor papers in like investor research that's been done on should you reinvest, should you Allocate the capital. What's the most tax efficient? Do you know what it is? For me, I'm pretty lazy and I just sometimes want to sit on my butt. So I just kind of like let the dividends reinvest and I don't have to think that hard about them and still get a pretty decent return. Our second question comes from John Zengerli. I hope I said that name right. And his question is more or less about green energy or alternative energy options. Here it says, for various reasons, I'm very interested in moving past fossil fuels. As an investor, what are some of the best ways to invest in green energy? Matt, why don't you go first. I feel like I have way more thoughts on this one, so I'll save mine for the end.
- [22:28]
C
Yeah, I was just going to say this question should have been directed to you, but I mean the biggest play on alternative energy in my own portfolio is Brookfield Corporation, ticker symbol is bn. They have their subsidiaries, they have Brookf Infrastructure or Brookfield Renewable Energy. They have a few different partnerships that have various investments in different renewable energy infrastructure. I'm generally more of a. I like investing in the tangible things like the real estate, the infrastructure behind these plays. So that's the biggest play that I have. But I'm curious to see what you're going to say because that's where I form my watch list on energy stocks anyway.
- [23:03]
B
Yeah, look, I think what Tyler, how much is Canadian solar up since you mentioned it on this program? So that makes you the guru right there. But I kind of agree with Matt, just kind of with the Brookfields or whoever else. I don't want to be overexposed to one project or one technology. What I like about like the Brookfield approach and there's others too, not just Brookfield, is that you get so much exposure and you have smart people minding the shop in terms of what you have. That's kind of my way to go about it, but go ahead.
- [23:35]
A
Investing in alternative energy, at least for the previous 20 years, has kind of been a miserable experience because despite being a rapidly growing industry, it's fallen so far down the commodity curve in terms of pricing that a lot of people can't make it because you got to cut your costs so fast. I think that dynamic's changing now with basically again we got to ring the bell. AI infrastructure build out, but increased energy usage is kind of changing the game in terms of electricity and pricing and all those things. It's making basically almost anyone attractive these days. And to that point. Solar power in general is doing incredibly well. Recently in the United States alone, they're expected to install 56 gigawatts worth of new solar in the United States in 2026. And that's like, you know, compared to like out of these talks about nuclear, which maybe 10 years from now we might get 6 gigawatts of new power. It's, it's just moving that much faster. I think it's going to deploy incredibly well and probably solve a lot of the problems that we've said nuclear is going to solve in coming years. So at least what I'm looking at it right now, I think there's some really good investments in solar power in general. First Solar and Canadian Solar are two companies that come to mind. I think over the next couple of years, if this if the trends that we're seeing with power development and where how that power is getting allocated across gas, solar, batteries, all that stuff I see utility scale solar is going to be one of the biggest winners. So yeah, First Solar, Canadian Solar look like two pretty attractive options right now. As always, people in the program may have interest in the stocks they talk about and that Motley fool may have formal recommendations for or against. So don't buy or sell stocks based solely on what you hear. All personal finance content follows Motley fool editorial standards and is not approved by advertisers. Advertisements are sponsored content provided for informational purposes only. To see our full advertising disclosure, please check out our show notes. Thanks to producer Dan Boyd and the rest of the Motley fool team for Lou, Matt and myself. Thanks for listening and we'll chat again soon.