Downgrades sent the home improvement sector tumbling Friday.

Home Depot

(HD) - Get Report

was off lately $2.28, or 7.3%, at $29.12 after Merrill Lynch's Peter Caruso downgraded the stock from strong buy to neutral. Caruso raised a host of concerns, from weaker sales trends compared with rival

Lowe's

(LOW) - Get Report

to potential inventory problems, that could weigh on the stock.

"We believe same-store sales are just slightly positive in the current quarter, well below the mid-to-high single digit level that we believe Lowe's is generating," Caruso wrote. "With many retailers in June reporting strong results and with Lowe's potentially showing more vigor than Home Depot on the comp-store sales line, we believe investors will become increasingly convinced that Home Depot's sluggishness is less related to the economy and more related to competitive positioning issues that need to be addressed."

Caruso also wrote that the company has slashed inventories to such a level that sales could be negatively impacted.

Meanwhile, Lowe's was also off Friday after Jefferies downgraded the stock to hold from buy. Lowe's, once not mentioned in the same breath as Home Depot, now trades at a higher multiple than Home Depot. For this reason, Jefferies' Donald Trott says, there is limited upside for Lowe's shares in the near term.

For some time, the valuation gap has narrowed between the two companies, and earlier this year Lowe's -- which is widely thought of as having more growth potential than Home Depot -- became more richly valued. Based on next year's earnings estimates, Home Depot trades at about 17 times next year's earnings, compared with a P/E of 21 for Lowe's, according to Thomson Financial/First Call.