Foreclosures may be hell for the homeowners involved, but right now they are boosting the housing market and the broader economy. Lowe’s better-than-expected quarter on Monday was proof of this, Cramer told viewers.
Lowe’s makes its money when housings sales are up, which is something that happens only during certain stages of the real estate cycle. Stage one comprises rising prices and a soaring market. This peaks at stage two, the point where buyers refuse to pay up for a home and sellers refuse to come down. This deadlock is bad for Lowe’s business. Stage three, though, marks a willingness by both groups to agree on a price, kick-starting a new phase of increased sales. We’re in stage three right now, Cramer said, and it was the reason for the company’s earnings beat.
Why? Because people shop at Lowe’s either to fix up their homes for sale or to improve them once they are bought. And the rise in foreclosures has played a key roll in encouraging both the selling and buying of homes. Also, prices and interest rates are now low enough that it makes sense for many people to own rather than rent. So this key area of the economy is beginning to stir, and we know this thanks to Lowe’s quarter.
Investors who dig a bit deeper can figure out which stocks to buy based on which products were leaving Lowe’s shelves the fastest. The company said that while indoor housing products weren’t doing well, gardening and painting goods were. The reasoning makes sense when you consider that the easiest way to spruce up a house is to mow the lawn and add a fresh coat of paint. So Cramer recommended Scotts Miracle-Gro and Sherman-Williams as a play on this trend. Sherman-Williams may have added more than $2 to its share price on Monday, but Cramer still thinks there is more upside to come.
Scotts Miracle-Gro works for a number of reasons, in fact. Lowe’s said that grass-product sales were up big, especially in foreclosure-heavy California, but also at-home gardening saw a similar increase. Management attributed a big part of the earnings beat to this area of business.
Cramer also likes Scotts’ Smith & Hawken outdoor furniture, which is sold through Lowe’s. He thinks this $35 stock could jump to $45 if only Scotts stopped its stand-alone retail strategy and sold exclusively through Lowe’s and the Web. Not to mention, Lowe’s also said on Monday’s conference call that more and more people are handling yard work themselves these days, rather than paying for the service, and that also could lift Scotts’ business.
We’re still in the early part of this overall trend, Cramer said. Investors can buy Scotts immediately if they want, but he recommended waiting for a pullback before building a position in either Lowe’s or Sherman-Williams. Given how gloomy many on Wall Street have been recently, a dip in share price is all but inevitable – no matter how bullish the market truly is.
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