Is Lowe’s a Buy Near All-Time Highs?

With shares of Lowe’s (NYSE:LOW) trading around $40, 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.

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T = Technicals on the Stock Chart are Strong

Lowe’s stock has witnessed a powerful move towards higher prices over the last couple of years. This move has taken the stock to all-time high prices where it is now consolidating a bit. 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 slightly 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

28.67%

63%

62%

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

July Options

Flat

Average

August 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’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 Q1

2012 Q4

2012 Q3

2012 Q2

Earnings Growth (Y-O-Y)

13.95%

-0.41%

94.44%

0%

Revenue Growth (Y-O-Y)

-0.49%

-5.01%

1.86%

-2.02%

Earnings Reaction

1.22%

-4.8%

6.19%

-5.77%

Lowe’s has seen increasing earnings and decreasing revenue figures over most of the last four quarters. From these numbers, the markets have had mixed feelings about Lowe’s recent earnings announcements.

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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), Orchard Supply Hardware (NASDAQ:OSH), and sector?

Lowe’s

Home Depot

Lumber Liquidators

Orchard Supply Hardware

Sector

Year-to-Date Return

14.84%

24.62%

56.88%

-70.58%

13.59%

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 stock has been on a strong surge higher that has taken it to all-time high prices. Over the last four quarters, earnings and revenue figures have been up and down which have produced mixed feelings among investors in the company. Relative to its peers and sector, Lowe’s has been an average performer year-to-date. As the home improvement trend continues, look for Lowe’s to OUTPERFORM.

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