JBL: Home Sweet Home

What's bad for real estate will be good for home improvement stocks, especially Home Depot and Lowe's.
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There's nothing like news you don't expect.

KB Home

(KBH) - Get Report

issued a warning about cancelled home orders, and

Toll Brothers

(TOL) - Get Report

announced that orders for new homes fell 21% in the first quarter and warned of a weaker year ahead. Then housing numbers came out much better than expected, up 14.3% from December and 4% from a year ago. This apparent discrepancy perplexed a few analysts who believed we were starting to see a decline in the real estate market.

I believe the explanation is very simple. January was a very mild-weathered month, and the builders took advantage of this to get an early start on spring orders. Either way, whether we are at a top in the housing market or are on our way down, money will be leaving real estate looking for a home. Every sign still points to the fact that the

Fed

accomplished its goal of slowing down the demand for adjustable-rate mortgages, thereby orchestrating a soft landing.

The conditions are ripe for a solid year in the market, barring a catastrophe -- man made or otherwise. Interest rates should stop rising by late spring, unemployment is extremely low and wages are increasing. I also believe the slowdown in home prices will benefit the market: In 2001 when money was no longer rewarded in the stock market after a great bull run, it found a home in real estate. That situation is about to reverse. Money always goes where it is rewarded, and when real estate stops offering the best return, money will go to where it's rewarded, and that will be the stock market.

Meanwhile, the savings rate has been negative, but that doesn't take into account the increased value of people's homes. When consumers stop seeing their net worth increasing because of rising home values, they will start saving once again.

These two things will greatly help the stock market, along with the shares of two retailers I own.

To watch John Layfield's video take of this column, please click here

.

Home & Hearth

Just because home values drop doesn't mean people will sell their homes or quit spending on them. Homes are not like stocks; you live in them. If they decline, you still live in them, therefore you keep them.

The Department of Commerce reported that year-over-year retail spending on building and garden supplies was up over 14%. Part of this, too, was related to the warm weather. However, it is a trend we will see throughout the year.

Home Depot

(HD) - Get Report

and

Lowe's

(LOW) - Get Report

are two stocks that will benefit from this trend.

Home Depot is the world's largest home improvement retailer and the second-largest retailer in the U.S. It failed to see the retail sales slowdown that started in 2000 and has had to play catch-up with store modernization, exclusive merchandise, and better marketing. Its spending on RFID technology, which will eventually replace the bar code, will produce much better supply chain management. The company has at last caught up to the curve.

Home Depot has a forward price-to-earnings ratio of just over 13, based on consensus estimates of $3.03 a share. It has a projected growth rate of about 13, giving it a P/E-to-growth, or PEG ratio, of about 1. With a yield of 1.5%, if this stock merely appreciates with earnings, you are looking at year-over-year share growth of 13%, not counting dividends (current yield: 1.4%). Considering that home improvement sales have outgrown retail sales for the last 10 years and that we have record home ownership, one could realistically see a multiple expansion driving the stock price 20% higher in a year.

Home Depot recently agreed to buy

Hughes Supply

(HUG)

for $3.2 billion. HUG is a leading distributor of construction, repair and maintenance products with sales of more than $4 billion.

Home Depot recently received approval to invest in a store in China, which would add to its international operations. Also, Home Depot reportedly is interested in acquiring a stake in the Chinese retail chain

Orient Home

; the company hasn't addressed the rumors, but either way, this is a turnaround story that I really like.

The Upstart

Lowe's was far ahead of Home Depot in realizing the potential of the female market. Lowe's realized that women made many home improvement decisions. (Honestly, they could have asked any married man and got the same answer.) Lowe's catered to a more pleasant shopping environment and its "up the continuum" strategy. The strategy gets customers to spend more by offering them a wide selection of products, including higher-priced options.

Lowe's trades at a premium to Home Depot and has a forward price-to-earnings ratio of a little more than 16, based on consensus estimates of $3.95 a share. However, with growth projected to be around 17%, Lowe's has a PEG ratio of a little less than 1.

The numbers on Home Depot and Lowe's are very similar. Home Depot and Lowe's are both market leaders in the do-it-yourself, do-it-for-me and professional service markets.

It is hard to pick a winner between two, so why not buy both? I believe both stocks are worth owning, considering the favorable economic conditions for the home improvement sector.

Finally a quick update on

Dell

(DELL) - Get Report

,which I recommended in my

debut column for

TheStreet.com.

Late Thursday, Dell reported an increase of 52% in profits due to an increase in sales outside of the U.S. However, the company lowered revenue expectations for the year. I still own Dell; however, I am not as bullish on the stock as I was and would not recommend buying at this point.

Remember, being poor is bad. Staying that way is stupid.

At the time of publication, Layfield was long Home Depot, Lowe's and Dell, although holdings can change at any time.

A former All-American offensive lineman at Abilene Christian University, John Layfield played professional football for the then-Los Angeles Raiders and later in the World League. After wrestling in Japan, Mexico and Europe, Layfield arrived in the WWE in the mid-1990's. A former WWE champion, JBL was a featured wrestler at WrestleMania 21 and can also be seen on

Friday Night SmackDown!

on UPN. Outside of the ring, JBL is a self-taught investor who was recruited to write a personal finance book,

Have More Money Now

, which was released in the summer of 2003. He has appeared on finance shows on CNN and the Fox News Network. He is co-chairman of the Smackdown Your Vote! Campaign and he has joined both the USO and Armed Forces Entertainment (AFE) for tours through Iraq, Afghanistan and other Middle East countries. He regularly visits the Walter Reed Army Medical Center and the Bethesda naval hospital to meet with wounded troops.