The Five-Day Forecast: Home Depot vs. Lowe's

Battle Of The D-I-Y Stores

Home Depot (HD - commentary - Cramer's Take) is set to release quarterly results on Tuesday, May 20, while archrival Lowe's (LOW - commentary - Cramer's Take) is expected to weigh in the next day.

In years past, investors assumed that in economic downturns, homeowners would spend money on home repairs if they couldn't trade up to the next house. That has clearly not been the case this time around, as both Home Depot and Lowe's have been generating negative year-over-year sales comps for much of the last two years. And that trend is likely to continue throughout 2008.

So expect little cheer on the conference calls of these two D-I-Y retailers. Lowe's is expected to post a profit drop of 17% from a year ago, while Home Depot's profits likely fell close to 30%, according to consensus estimates. And analysts think that second-quarter profits are also likely to be down 10%-20% for each of these firms. After that, the year-over-year comparisons will likely become much more favorable. Not only will year-ago results be comparatively weak. But many economists think that housing sales will bottom out in coming months and could show signs of life later in the year. If and when that happens, many consumers will drive to their local D-I-Y stores and spend money to primp up their houses for sale.

So here's the play. Listen to next week's conference calls. Get a feel for how close these management teams think that they are to a bottom in their businesses. You don't want to wait until they have found a bottom. You want to buy their stock while the bleakness persists, but is winding down. If either of these stocks take a hit after next week's earnings reports, you may want to start building positions. If you wait until the housing market snaps back to life, it may be too late.

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David Sterman has been an equity analyst and financial journalist for 15 years, most recently serving as Director of Research at Jesup & Lamont Securities.