- The aging population ensures sustained demand for housing, and aging houses ensure the demand for home improvement products and services.
- Home improvement stocks tend to move with home buying demand and falling interest rates.
- Many home improvement stocks can provide growth and income, notably during economic expansion cycles.
- 5 stocks we like better than Lowe’s Companies
The reality is that nothing lasts forever, including your home and everything in it. Just when you think all is quiet on the home repair front, your water heater will go out. Or your kids will throw a baseball through the living room window. Or an episode of Fixer Upper will spark a desire to redesign your entire house.
But a savvy investor can see the silver lining in the seemingly endless honey-do list: these older houses and renovation projects increase demand for home improvement products and services, thereby increasing the value of the companies who provide them. By the end of this article, you’ll understand what drives this dynamic market sector and how to capitalize on it by investing in home improvement stocks.
Basics of the home improvement industry
Changing consumer preferences, aging homes, technological advancements and a robust real estate market fuel the home improvement industry. Valued at $342 billion in 2022, the sector is projected to grow over the next eight years at a compound annual growth rate (CAGR) of 6.7% and could reach $575.5 billion by 2030.
Key players in this industry are building materials manufacturers, home improvement retailers, construction companies, contractors and many specialized service providers. No matter if you are a DIYer or a professional, these are the businesses that help you get the job done.
In 2020, COVID-19 sparked a massive shift toward people working and socializing from home. Finding themselves confined to their houses, restless homeowners got creative, and the number of DIY renovations skyrocketed as they upgraded their indoor and outdoor living spaces for functionality and comfort. While the U.S. economy shrank by 3.5% that year, home improvement and repair spending increased by more than 3%, according to the Joint Center for Housing Centers of Harvard University (JCHS).
In addition, from 2019 to 2022, the overall amount spent on home updates increased from $328 billion to $472 billion. As many people have returned to pre-pandemic lifestyles, that boom may be ending, especially with interest rates and inflation both on the rise.
Trends driving the home improvement industry
As homeowners continue to value the enhancement of their living spaces, the home improvement industry is poised for sustained growth.
- Consumer preferences: Television shows like Fixer Upper and The Home Edit have sparked a desire for aesthetically pleasing and functional homes, prompting a surge in remodeling projects. In 2022, the most popular rooms to renovate were kitchens and bathrooms, with median spending of $20,000 and $13,500, respectively. These numbers are up 33% (kitchens) and 50% (bathrooms) from 2021.
- Aging homes: As 59% of the homes in the U.S. were built before 1980, and 92% built before 2000, older homes in need of repair will continue to bolster demand for home improvement products and services.
- Smart home technologies: Reflecting a growing appetite for convenience and efficiency, homeowners are investing in innovative solutions like home automation.
- Sustainability: With eco-friendly materials and energy-efficient products gaining traction, major industry players have adapted to meet evolving consumer expectations.
- Flexible work arrangements: As companies continue to offer employees the option to work from home, demand for home offices and multi-functional living spaces will continue.
Key factors influencing home improvement stocks
The performance of home improvement stocks is tied to factors that extend beyond the traditional realms of supply and demand. Macroeconomic indicators, shifts in consumer behavior and the integration of innovative technologies all help determine the landscape of the home improvement sector.
Market trends and innovations
Rapid technological advancements are reshaping the industry and influencing consumer behavior. One significant driver of growth is the integration of smart home technologies, which create interconnected ecosystems and allow for seamless control and automation of various functions within the household.
The impact of artificial intelligence (AI) and the Internet of Things (IoT) is evident in the emergence of smart appliances and systems that learn and adapt to user preferences. Whether an intelligent thermostat that automatically adjusts your home’s heating and cooling settings for optimal performance or a lighting system controlled through voice commands, homeowners increasingly seek products that enhance convenience, energy efficiency and security.
Technological advancements are also revolutionizing the way homeowners plan and execute their projects. Virtual and augmented reality tools provide immersive experiences, allowing users to visualize renovations before they commence. It streamlines the planning process and enhances customer satisfaction by providing a more accurate preview of the result.
Furthermore, sustainable and eco-friendly technologies are gaining prominence. Energy-efficient materials, solar solutions and eco-conscious construction practices are becoming integral components of home improvement projects. As environmental awareness grows, consumers are increasingly inclined towards products and services that contribute to sustainable living.
Home improvement stocks are susceptible to regulatory changes. Rising interest rates, for example, have introduced complexity to the landscape of home improvement stocks. As the cost of borrowing increases, consumers are less likely to undertake expensive home improvement projects. Higher mortgage rates may also deter potential homebuyers, leading to decreased home sales and construction activity, but this could be a good thing for home improvement retailers that may see some benefits if people are more inclined to renovate rather than move.
Additionally, policies related to tariffs and trade agreements can affect the costs of imported materials like steel or lumber, influencing the overall cost of home improvement projects and impacting the profitability of companies dependent on global supply chains.
Other examples include government implementation of stringent sustainability standards (which can benefit the share values of companies that provide eco-friendly products and services) and any changes made to zoning laws, building codes or tax incentives (which can directly influence consumer behavior by affecting the types of projects homeowners can undertake).
Consumer behavior and preferences
Sustainability is not merely a trend; it has become a guiding principle for many consumers, influencing their choices in building materials, appliances and construction practices. Homeowners now seek eco-friendly products that promote energy efficiency, reduce waste and minimize their homes’ carbon footprint.
Companies investing in research and development to create sustainable building materials, energy-efficient technologies and eco-friendly construction methods can capitalize on this growing market trend.
Environmentally conscious businesses attract investors looking for long-term value and ethical investment opportunities. These businesses also often enjoy positive public perception, which can enhance brand loyalty and shareholder value.
Consumers today also place a high value on:
- Aesthetics and design: Whether it’s color schemes, open-concept living, minimalist designs or vintage-inspired renovations, consumer aesthetics drive the demand for specific products and services.
- Health and wellness: Features like air purification systems, ergonomic furniture and home gym setups cater to the preference for spaces that promote physical and mental well-being.
- Aging in place: The growing preference to remain in your home as you age rather than move to assisted living facilities has increased demand for modifications like ramps, grab bars and other features that ensure long-term usability.
- Integrated living spaces: Homeowners are investing in smart thermostats, lighting systems, security cameras and other tech-driven solutions to enhance convenience, efficiency and home connectivity.
Why home improvement stocks matter for investors
Home improvement stocks offer promising potential for significant returns, stability and resilience. Renovation projects and home upgrades tend to persist during economic downturns, as homeowners prioritize maintaining and enhancing their existing living spaces instead of buying a new home.
3 best home improvement stocks
This list of home improvement companies contains household names that stand out not just for their market capitalization but for their innovative approaches, strategic positioning and ability to navigate the ever-changing currents of consumer preferences and industry trends. Here are three home improvement industry leaders to add to your portfolio today.
The Home Depot Inc.
The Home Depot Inc. NYSE: HD, the world’s largest home improvement company, employs over 500,000 workers and operates over 2,300 stores across the U.S., Mexico and Canada. The company generated $157.4 billion in annual revenues in 2022, with an average ticket of $90.36 on 1.666 billion transactions. The average store is nearly 105,000 square feet, offering over 35,000 in-store and over one million online products. It has 90 distribution centers across the U.S. In 2022, the company generated $627.17 per square foot.
Home Depot manages inventory exceptionally well, utilizing its digital shelf replacement tool that reduces out-of-stock rates by 30%. This enables the company to keep its shelves stacked with relevant and in-demand items to accommodate its customers, ranging from professional contractors to DIYers, and keep them coming back.
Home Depot stock has a five-year performance of 84.84% with a 2.58% annual dividend yield. This blue-chip stock has raised its dividends for more than 12 consecutive years. Based on 26 analyst ratings, Home Depot is currently a “moderate buy” with a price target of $339.57 and an upside of 4.89%.
Follow the Home Depot stock ticker to see if the company can continue beating out its main competitors: Lowe’s Companies Inc. NYSE: LOW, Costco Wholesale Corp. NASDAQ: COST, Alibaba Group Holding Ltd. NYSE: BABA, Walmart Inc. NYSE: WMT and PDD Holdings Inc. NASDAQ: PDD.
Floor & Decor Holdings Inc.
Floor & Decor Holdings Inc. NYSE: FND operates as a multi-channel specialty retailer and commercial flooring distributor. The company operates 207 warehouse-format stores, five design studios across 36 states and employs almost 12,000 workers. In 2022, net sales increased 24.2% to $4.27. An average Floor & Decor store is 79,000 square feet and offers 4,400 products. With a renewed commitment to sustainability, Floor & Decor serves installers, commercial businesses and other sectors by providing tile, wood, laminate, vinyl and natural stone flooring products, as well as decorative accessories, wall tiles, and installation materials and tools.
The company generated $2.57 earnings per share over the last year and has a 38.1 price-to-earnings ratio. Based on 18 analyst ratings, the company is currently a “moderate buy” construction company with a price target of $93.83.
Floor & Decor’s main competitors include EMCOR Group Inc. NYSE: EME, Lowe’s Companies Inc. NYSE: LOW and The Home Depot Inc. NYSE: HD.
Arhaus Inc. NASDAQ: ARHS is a lifestyle brand and premium home furnishings retailer. The company provides furniture, lighting, textiles, and décor for indoor and outdoor spaces. Arhaus distributes its products through an omni-channel model comprising showrooms, e-commerce platform, print and digital media and in-home designer services.
Arhaus employs over 2100 workers and operates over 75 retail showrooms (the vast majority with in-home interior designers), six design Studios (focusing on customization and curation) and three outlets spanning 29 states. An average retail store is around 17,000 square feet, and an average Design Studio is around 5,000 square feet. Arhaus’s products typically have a higher price tag due to its commitment to sustainability and artisanal craftsmanship.
Arhaus has experienced strong growth over the past three years, with net revenue of $1,228.9 million in 2022, $796.9 million in 2021 and $507.4 million in 2020. In 2022, overall sales were up 54%, retail sales up 57% and e-commerce channels up 43%. Based on eight analyst ratings, the company is a “moderate buy” with a price target of $13.78 and a forecasted upside of 45.6% from its current price of $9.46.
Arhaus’s main competitors are Haverty Furniture Companies Inc. NYSE: HVT, Ethan Allen Interiors Inc. NYSE: ETD, West Elm and Pottery Barn — both owned by Williams-Sonoma Inc. NYSE: WSM — and privately held companies Ashley Furniture, Room and Board and Crate and Barrel.
Risks and challenges in home improvement stock investments
Investing in home improvement stocks has inherent risks tied to various macroeconomic factors that can adversely impact the sector.
Economic downturns and recessions can significantly dampen consumer spending on nonessential items, affecting the demand for home improvement products and services. Fluctuations in interest rates may also influence consumer borrowing and, consequently, their ability to fund renovation projects or new home builds. Moreover, the housing market’s health is intimately tied to the performance of the home improvement sector — a slowdown in housing starts or a decline in property values can have cascading effects.
To mitigate these risks, you can diversify your portfolio across industries to cushion against sector-specific downturns. You may also incorporate defensive stocks or sectors like utility companies, healthcare or consumer staples that tend to perform well during challenging economic times. In addition, employing risk management techniques like stop-loss orders or setting predefined exit points will help buffer against the potential volatility associated with home improvement stocks.
Tips for investing in home improvement stocks
Follow this advice to capitalize on the sector’s growth potential while navigating the challenges inherent in the market.
Do your research
Dig deep into the company’s recent earnings report and conference call transcripts. Scrutinize market trends. Figure out the key players and their competition. Read industry research reports and check for analyst upgrades. Get a handle on the regulatory landscape, economic conditions and consumer preferences that can change the way home improvement stocks perform.
Perform a technical analysis
This will help you visualize where a stock’s price has been and the potential for where it can go. Analyze the price action and history, which you can learn on candlestick charts, and ensure you know the stock’s current trend and support and resistance levels.
Pay attention to market timing
Investing during periods of economic strength may offer more favorable conditions for growth, and macroeconomic factors like interest rates and housing market trends will help you gauge the industry’s health.
Determine your investment horizon
Determine whether you want a growth or income stock, or both. Long-term investors may focus on established companies with solid fundamentals, anticipating sustained growth, while short-term strategies might involve capitalizing on specific trends or market fluctuations.
Employ risk management protocols
Recognize potential pitfalls, diversify your portfolio, set realistic goals, establish stop-loss orders and be prepared to adapt your strategy based on market dynamics.
Stay on top of technological advancements and sustainability trends
Due to increased consumer demand, companies aligned with eco-friendly practices and innovative solutions may present compelling investment opportunities.
Give your portfolio a fresh coat of paint
The home improvement industry is a resilient force in a world where the only constant is change. The market is buzzing with innovation, from smart home tech to sustainable solutions.
But remember, success is all about timing, DIY research and a toolbox full of diverse strategies. As the home improvement sector continues to remodel itself, those who navigate the trends, stay flexible and seize the opportunities might find their investments building serious equity.
Here are answers to some frequently asked questions about these types of retail stocks.
Are home improvement stocks a good buy right now?
This largely depends on your holding time horizon. Housing prices have historically risen as the growing population will continue to need homes. Aging homes require repairs and improvements, driving home improvement stocks. Home improvement stocks may be a good buy when interest rates stop rising or even start to fall.
What are the best home improvement stocks to buy right now?
The largest home improvement retailer is Home Depot. Keep the Home Depot stock ticker on your watchlist if you’re looking for the biggest and arguably the best. If you want to diversify into specific parts of home improvement, like paints, then Sherwin-Williams can be considered one of the best stocks.
What is the largest home improvement company?
Home Depot is the world’s largest home improvement company, with sales reaching $157.1 billion in 2022. It operates over 2,300 stores carrying more than 35,000 products. The average Home Depot store is 105,000 square feet, and we highlighted it as the first of three stocks in this article.
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