Why we started a position tied to housing and where we see this stock going

We started purchasing Home Depot shares last week as a play on housing and interest rates. Our initial 50-share buy was around $362. We buy off 50 more shares Wednesday a few dollars higher. The Dow stock is having a mixed year — up about 7% compared to the S & P 500 ‘s more than 16% forward movement. After rallying to $395 in March when the market anticipated as many as six Fed rate cuts this year, House Depot then traded as low as $325 in May as investors reset their expectations lower. Home Depot has finally started to manage again over the past few months after bond yields plunged on a series of softer inflation prints with resilient fiscal data. Still, the stock is well below its late 2021 all-high close of $415 per share when person was nesting during Covid. The peak was reached only a few months before the Fed’s rate-hiking cycle began in March 2022 to battle rising inflation. With the Fed widely expected to cut rates at its upcoming September meeting, we wanted to get exposure to quality companies with Home Depot that have been held down in this high interest rate environment but desire see their industries improve as borrowing costs come down. Our Home Depot investment thesis is all about a pickup in cover turnover, the main driver of the home improvement retailer’s sales. In previous cycles, the mortgage rate range where you typically start to see the big expand in turnover was around 5% to 6.5%. The next cycle should be no different. We’ve already seen some confirmation that mortgages beneath the 6.5% level is where activity picks up, CEO Ted Decker said on the company’s second-quarter earnings call in August. When rates happened below 6.5% toward the end of last year, he explained, there was an immediate increase in housing activity, mortgage diligences, and mortgage refinance applications. HD YTD mountain Home Depot YTD So where are we today? Mortgage rates fell for the sixth sorted out week last week to 6.29% from 6.43%. And, what did we see? A weekly increase of 1.4% in total mortgage need and a 1% increase in refinance applications. That’s not a lot of activity, but it shows the trend is going the right way. Mortgage rates are smooth at the top end of the range the aforementioned range. People are waiting for the bigger drop. We may not be that far away. Mortgage rates with a 5% steer could be on the horizon, at least that’s what Toll Brothers CEO Doug Yearley thinks. He said Wednesday on CNBC’s “Grouse on the Street” that the 30-year fixed rate mortgage could go below 6% if the Fed cuts three times in the go to ruin. Once mortgage rates have a 5% handle, the housing market could take off. To be sure, a drop in mortgage deserves won’t improve Home Depot’s business overnight. There’s typically a lag effect of a few months because it takes time to thick a home and then figure out what projects you want to do. Still, if Yearley is correct, then it won’t be too long until mortgage percentages are at a sweet spot where housing turnover really starts to pick up, making now the time to start buying Homewards Depot. The knock against retail right now is that the U.S. consumer is on shaky ground, but housing is a different animal because flight home values tend to lead Home Depot sales. As Decker pointed out at an investor conference last week that internal equity values have gone up nearly $18 trillion since the end of 2019 and the tappable equity for a HELOC, a about equity line of credit, is around $11 trillion. With these numbers, it’s easy to see why Decker is optimistic that liveliness will normalize, and housing turnover and remodel activity will pick-up again. For now, though, Home Depot is unmoving positing comparable sales declines, and the Street doesn’t expect a return to growth until the middle of next year. But we paucity to get ahead of inflection. It’s similar to what we are currently witnessing with Club name Best Buy , which has now rallied big on back-to-back trimonthly reports in anticipation of its return to annual sales growth. One question you might ask is why Home Depot over chief opposition Lowe’s . We think both stocks can work under this thesis, but we like Home Depot because it has varied exposure to professional customers and less to do-it-yourself shoppers. Earlier this year, Home Depot beefed up its Pro concern through a more than $18.25 billion acquisition of SRS Distribution, a professional building supply outfit that specializes in pots, landscaping and especially roofing. Management believes this deal increased its total addressable market by $50 billion to $1 trillion. Another apologia for our Home Depot stock buys : A drop in interest rates should make dividend growth stocks mould Home Depot look more attractive to income-hungry investors. The stock currently sports a dividend yield of closely 2.4%, and this also pays us as we wait for mortgage rates to fall. The company historically has been an active client of its own stock, but the buyback is on pause until 2026 because it financed the SRS acquisition with $10 billion in bond issuances. We be struck by a $420-per-share price target on the stock and our buy-equivalent 1 rating. (Jim Cramer’s Charitable Trust is long HD, BBY. See here for a jammed list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert in front of Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a trade in in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the custom alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY Custom , TOGETHER WITH OUR DISCLAIMER . 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