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| Articles and Tutorials |
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| "Look Twice" |
| by Doug Sutton |
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It is a fact that most people make comparisons and conduct a large part of their life based on those comparisons. Who has the bigger house, the newer car or the more attractive spouse? The stock market is no different, everything is based on comparatives. Who has a larger capitalization, which has bigger earnings, who has the fastest growth rate, etc? For the experienced trader, or for those who want to raise their trading to a higher level, it is essential that they learn how to make the right comparisons.
When looking at a stock it is imperative that a comparison be made to another stock that does the same thing, in other words, they are part of the same sector. Some comparisons are easy; one company makes money and the other one does not, one has good institutional ownership while the other does not, etc. For our comparison we are going to look at two great companies side-by-side and reveal the subtle comparisons that are the sign of a great stock picker. You will have the chance to make a decision as to which stock you would pick, neither is the wrong answer. But one is a better answer. Good luck.
The two companies that we are going to look at are Lowes and Home Depot, the two giants in the hardware/building materials sector.
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Lowes |
Home Depot |
| Average volume |
5,160,680 |
16,325,480 |
| Common shares |
780,944,000 |
2,325,758,000 |
| 52 week high |
$49.95 |
$52.60 |
| 52 week low |
$32.50 |
$21.01 |
| PE |
19.6 |
13.63 |
| Earnings last 12 |
$1.74 |
$1.56 |
| Earnings forward |
$2.13 |
$1.71 |
| Institution ownership |
80% |
63% |
| Current ratio |
1.59 |
1.71 |
| Price to book |
3.35 |
2.46 |
| Return on assets |
8.7% |
11.7% |
| Return on equity |
17.2% |
18% |
| 5 yr. growth |
26.52% |
23.85% |
| Debt to equity |
.48 |
.07 |
| Debt to equity |
.48 |
.07 |
| Profit margin |
5.3% |
6.5% |
| Price to revenue |
.86 |
.93 |
OK, who are you going to buy? Home Depot trades three times the daily volume as Lowes. It has a PE that is over 30% lower than that of Lowes, that is a BIG plus! Home Depot is also trading at a price to book value that is below that of the sector whereas Lowes is 14% higher than that of the sector, another plus for Home Depot. Add on the fact that Home Depot has a 3% advantage in return on assets, a better return on equity, a huge advantage in the debt to equity category and a better profit margin, Home Depot is looking pretty good.
But is it? Let's take a look at the BIGGER picture. Most of it is in the numbers above and little bit of it comes from deeper research. First, the large advantage in daily shares traded is misleading. Yes, Home Depot trades three times the daily volume of Lowes, but it has three times the number of common shares. So, on a percentage basis determined by dividing the number of shares by the daily volume it is virtually equal between the two stocks.
As far as the advantage in PE is concerned, that is deceptive as well. When comparing the PE of the stocks at their 52 week highs, Lowes wins the battle. The current Home Depot advantage is gained only because it is trading at a price 39% LESS than Lowes. Is this truly an advantage?
The price to book advantage that Home Depot has also relates to its current low price compared to that of Lowes. When comparing their price to book ratios when trading at their 52 week highs, Lowes was actually 20% less than that of Home Depot.
By now you are probably saying to yourself, "Get over it Doug. That high was then and this is now!" So true. Let's take a look at where the companies are now in relationship to their 52 week highs. Lowes is off 32% from its 52 week high and Home Depot is 60% off its high. I don't know about you, but it seems to me that a 32% loss is one heck of a lot better than a 60% loss.
How many times have you heard over the last three years since the burst of the internet bubble, "It is the earnings, stupid!" Over the last 12 months Lowes has earned $1.74 a share while Home Depot earned $1.56. Not much of a difference. But going forward Lowes is anticipated to earn $2.13, an 18.4% growth while Home Depot is expected to earn $1.71, an 8.8% growth. Lowes is the hands-down winner here. Cap that with the fact that the large institutions own 80% of Lowes compared to 63% of Home Depot I am leaning towards owning Lowes.
To add just a little more research, the two stock split within eight months of each other. Lowes split 2:1 on July 2, 2000 to a price of $37.14. After three years of steady market declines Lowes is currently trading 8.2% below that split price. Home Depot had a 1.5:1 stock split on December 31, 1999 to $68.75. It is now trading over 69% below that price.
This research took me about 15 minutes to do. It could just be the best 15 minutes spent in your trading experience!
This is just a part of what I teach about fundamentals in my two-day workshop. The technical indicator's training easily takes twice as long as this. You can no longer afford to trade WITHOUT the secrets I have to share. Join me soon.
Good luck and good trading
Doug Sutton
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