Prepare to Invest in Two Dow Jones Stocks Anticipating a Potential Housing Recovery by 2025
"Home sales have been hit hard by higher interest rates in recent years, affecting the performance of housing-related stocks. However, there's a sense of optimism in the air.
"The market for buying homes is showing signs of revitalization after almost two years of stagnation," commented Lawrence Yun, Chief Economist at the National Association of Realtors. This observation follows a 2% growth in pending home sales in October, making it the third consecutive month of improvement.
Two stocks from the Dow Jones Industrial Average (^DJI -0.20%) could potentially profit from a potential housing rebound in 2025, and offer promising returns over the long term.
1. Home Depot
Despite the slump in the housing market, Home Depot (HD 0.62%) has managed to hold its ground fairly well over the past three years. Despite its current 4% return, it has underperformed the 24% return of the Dow Jones average at the time of writing.
Home Depot's growth has slowed down. It reported a decrease in comparable-store sales in the last quarter, with high interest rates affecting consumers' enthusiasm for home improvements projects. For the fiscal year, management anticipates total sales to increase by approximately 4% annually, with a projected decline in comp sales of 2.5% and earnings per share dipping by 1%.
Despite a slight dip in earnings in a challenging period, Home Depot's impressive size as the largest home improvement retailer, high return on investment capital exceeding 30%, and management's confidence in the $1 trillion home improvement market, make it an attractive long-term investment.
Management is particularly focused on capturing a greater share of the wallet of professional customers. One of their strategies is to get closer to the customer. They have invested in expanding their supply chain with more fulfillment centers, allowing them to reach 90% of the U.S. population with same- or next-day delivery.
Home Depot's above-average profitability allows for a generous dividend to shareholders. They declared a quarterly dividend of $2.25 per share in November, which brings its forward dividend yield to an above-average 2.12%. Home Depot has paid a dividend for 37 consecutive years, a testament to the resilience of the business in economic cycles.
The stock is reasonably priced at a forward price-to-earnings (P/E) ratio of 28, but accelerating growth in a housing recovery is expected to push the stock to new heights.
2. Sherwin-Williams
Sherwin-Williams (SHW -0.64%) has followed a similar trajectory as Home Depot in recent years. It experienced a dip in 2022 in line with the housing downturn, but it has already begun to climb towards new highs as investors anticipate improving demand for paint.
Investing in a paint company may appear dull to some, yet rewarding stocks can sometimes be found in seemingly mundane industries. Over the past 10 years, Sherwin-Williams delivered a 352% cumulative return, surpassing the return from the Dow Jones Industrial Average.
The company generated $23 billion in revenue last year, with most sales coming from its paint stores. Its consumer brands group and performance coatings for industrial markets saw a decline in sales in the last quarter, but retail stores are holding up relatively well, with comp sales increasing by 2.2%. Sales at paint stores have remained stable in recent quarters.
"We are continuing to invest in the quarter to capitalize on what we see as an unparalleled long-term share gain opportunity," commented Senior Vice President James Jaye. Management is capitalizing on their competitors' struggles in a challenging environment to improve operations and digital capabilities, positioning themselves well to emerge stronger from the downturn.
Sherwin-Williams can invest in the future while maintaining stable bottom-line performance. For the fiscal year, management anticipates adjusted earnings per share to be between $11.10 and $11.40, representing growth of 8.7% at the midpoint of guidance.
The stock is also not cheap, trading at a forward P/E of 33, but this high-quality paint brand rarely trades at a discounted valuation. It should deliver double-digit annualized earnings growth over the long term, translating to comparable returns for shareholders. Like Home Depot, it should perform well as growth accelerates in a healthier housing market."
In light of the potential housing market rebound predicted for 2025, both Home Depot and Sherwin-Williams could be viable investment opportunities for those seeking long-term profits. For instance, Home Depot's robust financials and strategic investments in supply chain expansion make it a resilient choice, even in challenging economic conditions. As for Sherwin-Williams, its strong performance over the past decade and solid financial forecasts indicate that it could yield significant returns in a recovering housing market. In the realm of finance and investing, it's crucial to consider stocks that have the potential to prosper in various market scenarios.
