Is Lowe’s a Buy Near All-Time Highs?

With shares of Lowe’s (NYSE:LOW) trading around $46, is Lowe’s 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, Lowe’s delivered earnings and revenue figures that beat Wall Street’s expectations. The revenue beat is a very positive sign to investors who seek high growth out of the company.

T = Technicals on the Stock Chart are Strong

Lowe’s stock has been exploding higher over the last several years. The stock is currently trading near all-time high prices 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 above its rising key averages which signal neutral to bullish 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

23.93%

63%

61%

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

Put IV Skew

Call IV Skew

September Options

Flat

Average

October Options

Flat

Average

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

2013 Q2

2013 Q1

2012 Q4

2012 Q3

Earnings Growth (Y-O-Y)

35.38%

13.95%

-0.41%

94.44%

Revenue Growth (Y-O-Y)

10.26%

-0.49%

-5.01%

1.86%

Earnings Reaction

3.65%*

1.22%

-4.80%

6.19%

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

*As of this writing

P = Excellent Relative Performance Versus Peers and Sector

How has Lowe’s stock done relative to its peers, Home Depot (NYSE:HD), Lumber Liquidators (NYSE:LL), Orchard Supply Hardware (NASDAQ:OSH), and sector?

Lowe’s

Home Depot

Lumber Liquidators

Orchard Supply Hardware

Sector

Year-to-Date Return

29.59%

20.13%

89.65%

-96.40%

19.76%

Lowe’s has been a relative performance leader, 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 recently released earnings that have resulted in upbeat investors. The stock has been flying higher and is now trading near all-time high prices. Over the last four quarters, earnings have been rising while revenues have been mixed which have kept investors satisfied. Relative to its peers and sector, Lowe’s has been a year-to-date performance leader. Look for Lowe’s to OUTPERFORM.

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