Can Lowe’s Continue Higher?

With shares of Lowe’s (NYSE:LOW) trading around $47, is LOW an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Lowe’s operates as a home improvement retailer. It offers products for maintenance, repair, remodeling, and home decorating. The company serves homeowners and renters consisting of do-it-yourself and do-it-for-me as well as commercial business customers comprising of construction trade, and maintenance and repair organizations. After the housing bubble burst that led to the Financial Crisis in 2008, home and business owners are opting for home and business improvement over purchasing new properties. This trend is poised to continue as there are still a large amount of home and commercial locations readily available for consumers across the nation.

On Wednesday, the nation’s second-largest home improvement retailer, Lowe’s, reported its first-quarter earnings numbers. The company’s results showed continued growth, although they missed analyst estimates. Specifically, the company reported $624 million in earnings, or 61 cents per share, versus earnings of $540 million, or 50 cents per share, in the first quarter a year earlier. The fact that earnings per share growth grew more than earnings is a result of the company’s stock repurchase program — over the past year, the company repurchased more than $3 billion worth of its own stock and reduced the average number of shares outstanding by over 70 million. The company’s revenue growth was less impressive, with first-quarter numbers coming in at $13.4 billion versus $13.1 billion in the first quarter of 2013. Considering that many retailers are experiencing weak sales, this is a solid number.

We can also see from this number versus the company’s 15.6 percent earnings increase that margins are expanding. This is good news considering that many big-name retailers from Wal-Mart (NYSE:WMT) to Costco (NASDAQ:COST) are experiencing margin compression. While these numbers missed analyst expectations they are impressive, and they exemplify Lowe’s success as a retailer. The company has a stellar long-term track record of generating profits, growing its business, and returning capital to shareholders. It has a stellar track record of raising its dividend per share 51 years in a row. All of these points suggest that Lowe’s is a stock that investors should consider holding for the long term. But is it a buy today?

T = Technicals on the Stock Chart are Mixed

Lowe’s stock has been pulling back in recent times. However, the stock is currently surging higher and looks poised to continue. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Lowe’s is trading below its rising key averages which signal neutral to bearish price action in the near-term.

LOW

Source: Thinkorswim

Taking a look at the implied volatility (red) and implied volatility skew levels of Lowe’s options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Lowe’s options

19.50%

0%

0%

What does this mean? This means that investors or traders are buying a small amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

June Options

Steep

Average

July Options

Steep

Average

As of today, there is an average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a small amount of call and put option contracts and are leaning neutral to bearish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Lowe’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Lowe’s look like and more importantly, how did the markets like these numbers?

2014 Q1

2013 Q4

2013 Q3

2013 Q2

Earnings Growth (Y-O-Y)

24.49%

13.63%

34.29%

35.38%

Revenue Growth (Y-O-Y)

2.37%

5.52%

26.01%

10.26%

Earnings Reaction

-0.24%

5.42%

-6.16%

3.92%

Lowe’s has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have been pleased with Lowe’s recent earnings announcements.

P = Average Relative Performance Versus Peers and Sector

How has Lowe’s stock done relative to its peers, Home Depot (NYSE:HD), Lumber Liquidators (NYSE:LL), Builders FirstSource (NASDAQ:BLDR), and sector?

Lowe’s

Home Depot

Lumber Liquidators

Builders FirstSource

Sector

Year-to-Date Return

-5.03%

-3.79%

-21.80%

2.81%

-5.95%

Lowe’s has been an average performer, year-to-date.

Conclusion

Lowe’s enables consumers and companies to engage in the massively popular home improvement space through its products and services. The company on Wednesday reported its first-quarter earnings numbers. The stock has been pulling back in recent times, but is currently surging higher. Over the last four quarters, earnings and revenues have been increasing which has kept investors satisfied. Relative to its peers and sector, Lowe’s has been an average year-to-date performer. WAIT AND SEE what Lowe’s does this quarter.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

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