We’re starting a position in another stock that should see a lift from Fed rate cuts
We are initiating a position in Home Depot , buying 50 shares at roughly $361.22. Following the trade, Jim Cramer’s Charitable Trust will own 50 shares of HD at a weighting of about 0.55%. Now that the market is no longer overbought according to the S & P Short Range Oscillator , we are dipping into our large cash position to start a new position in Home Depot. Although we are putting some money to work Wednesday, we are keeping our first buy on the smaller side given our view that September could be a rocky month for the market. If volatility tied to economic concerns or the upcoming U.S. presidential election picks up in the weeks ahead, we’ll have plenty of room to keep adding to this position. Home Depot is having a mixed year, with shares up about 5% year to date. After rallying to $395 a share in March when the market anticipated as many as six interest rate cuts this year, the stock then traded as low as $325 in May as investors reset their expectations on Federal Reserve policy adjustments. But Home Depot has finally started to work again as rates plunged on a series of softer inflation prints with resilient economic data. Still, the stock is well below its late 2021 high of $415 a share — a peak it reached a few months before the rate-hiking cycle began in March 2022. Now, with the Fed widely expected to cut at its upcoming September meeting , we are looking to increase our exposure to quality companies like Home Depot that have been held down in this high interest rate environment but will see their industries improve as rates come down. We think rate cuts should help Home Depot take out its old high over time, and we are setting our price target at $420 a share. In previous cycles, the mortgage rate range where you typically start to see the big increase in housing turnover — the main driver of Home Depot’s business — is around 5% to 6.5%. We’ve already seen some confirmation that below 6.5% is where activity picks up, according to CEO Ted Decker on the company’s second-quarter earnings call in August. He said that when rates went below 6.5% toward the end of last year, “you saw an immediate increase in housing activity, mortgage applications, mortgage [refinancing] applications.” With mortgage rates currently at around 6.5% — and potentially falling further in the quarters ahead as the Fed becomes more accommodative — the time is right to start buying Home Depot. To be sure, a drop in mortgage rates won’t improve Home Depot’s business overnight. There’s typically a lag effect. Earlier Wednesday at a Goldman Sachs retail conference, Decker explained the process: “When you think of buy the home; get the mortgage; close in two, three months; move into the home, hang some pictures; figure out what project you might want to do; there’s definitely a lag for projects when you buy a new home.” Sure, there may concerns about the health of the U.S. consumer, but housing is a different animal because rising home values tend to lead Home Depot sales. And, as Decker pointed out at the Goldman conference, equity values have gone up nearly $18 billion since the end of 2019 and the tappable equity for HELOC (home equity line of credit) is around $11 trillion. Because of these factors, “we’re optimistic all things revert to the mean and things will get back to normal and that housing turnover and remodel activity will pick-up again,” Decker said. Although the current consensus estimate on FactSet doesn’t have Home Depot reporting positive same-store sales growth until the quarter ending in July 2025, we think the market will want to get ahead of inflection. It’s similar to what we are currently witnessing with Best Buy , which has now rallied big on back-to-back quarterly reports in anticipation of its return to annual sales growth. Home Depot joins Stanley Black & Decker in the portfolio as another housing-related rate cut winner. One question you might ask is why Home Depot over chief rival Lowe’s . We think both stocks can work under this thesis, but Home Depot had the better quarter of the two. We also prefer Home Depot because it has more exposure to professional customers and less do-it-yourself shoppers. Earlier this year, Home Depot beefed up its business serving contractors and roofers through the $18.25 billion acquisition of SRS Distribution , a professional building supply outfit that specializes in pools, landscaping and especially roofing. Management believes this deal increased its total addressable market by $50 billion to $1 trillion. Another reason to take a stake: A drop in interest rates should make dividend growth stocks like Home Depot look more attractive to income-hungry investors. The stock currently sports a dividend yield of nearly 2.5%, and this also pays us as we wait for mortgage rates to fall. The company historically has been active repurchasing its own stock, but the buyback is on pause until 2026 because it financed the SRS acquisition with $10 billion in bond issuances. Management wants to get its debt-to-EBITDAR ratio down to 2 from its current 2.6 before restarting the buyback. (Jim Cramer’s Charitable Trust is long HD and BBY. See here for a full list of the stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
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