The home improvement retailer was downgraded to "neutral" from "buy" by Goldman, which said the downgrade came as a result of "fading growth in housing turnover, our key leading indicator for home improvement sales".
Steven Pytlar, Chief Equity Strategist at Prime Executions, says the technicals are saying the problems are more with Lowe's than with the housing sector. Looking at a long-term chart of the iShares Homebuilder ETF, the ITB, Pytlar sees positive indicators for the homebuilding industry. The ITB is heavily skewed towards the largest home construction companies in the US, unlike other "homebuilder" ETFs which have large holdings in home appliance companies.
According to Pytlar, the ITB has recently broken out of a significant resistance level. "When we see that, it's usually a very positive indication that there's a lot of buying interest," says Pytlar, "that people are accumulating shares, money's coming back into the space. And, so we think overall, that means that there's a lot of optimism in the housing space."
Looking at a chart of the relative value of the ITB compared to Lowe's, Pytlar notes that Lowe's is now underperforming the homebuilder ETF.
"What we really think is happening here is that leadership in the space is changing," says Pytlar. "It's moving from maybe the home improvement retailers into the actual people who are building the homes which are the components of the ITB. We just think there's a little bit of rotation going on in the housing space, not that the housing space itself is fundamentally slowing down."
Chad Morganlander, portfolio manager at Washington Crossing Advisors, agrees with Pytlar that homebuilders are a good value. One of his reasons is the increasing ability for borrowers to get financing on home purchases.
"Consumer credit on the household mortgage side is now expanding," says Morganlander. That's something that hasn't happened since 2008. That bodes well for the entire housing market."
Morganlander believes Goldman was justified in saying Lowe's investors should take their profits now given that he sees homebuilders as more of a relative value.
"The housing market will continue to steadily increase," says Morganlander. "You'll start to see a glacial improvement within housing starts [and] home construction…. So, for 2014 into 2015 and, dare I say, into '16, we think that housing will continue to move forward."
To see the rest of the discussion on homebuilders with Pytlar on the technicals and Morganlander on the fundamentals, watch the video above.
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