TSC Ratings provides exclusive stock, ETF and mutual fund ratings and commentary based on award-winning, proprietary tools. Its "safety first" approach to investing aims to reduce risk while seeking solid outperformance on a total return basis.Investors, optimistic that the housing market was starting to rebound, have jumped on Home Depot ( HD) and Lowe's ( LOW) in the past month, sending their shares up 30%. But new data might put a clamp on the home improvement chains. Housing starts fell 11% and the number of building permit applications sank 9% in March, the Commerce Department said Thursday. The weaker-than-expected figures point to a real estate market that continues to languish despite a few signs of recovery earlier this year. As less money flows into housing construction, Home Depot and Lowe's must rely on do-it-yourself customers to drive sales. But for consumers worried about losing jobs and paying mortgages, buying lawn mowers and appliances will likely remain low priorities. The retailers' stocks could suffer if shoppers stay away from their stores. In the past year, Home Depot shares have fallen 7.1%, while Lowe's have slid 18%. Both outperformed the 36% decline of the S&P 500 index even as the housing market collapsed in some parts of the U.S. The retailers took a bigger hit in 2007, when shares of the companies fell more than 20%, quadrupling the S&P 500's 5.2% loss. The early drops of Home Depot and Lowe's shares foreshadowed a housing crisis whose depths continue to surprise investors. Home Depot's dividend is unsustainably high with a 3.5% yield and a 68% payout ratio. Management might have to cut the dividend if earnings continue to decline. Lowe's has a more comfortable dividend with its 1.7% yield and 23% payout ratio.
Home Depot might need to reduce its dividend to maintain a solid cash position and compete with its rival. Both retailers' dividend yields lag behind the average 3.9% yield of companies in the S&P 500. One bright spot in the housing numbers is that single-family home starts, the indicator's largest component, were unchanged from February. While companies are continuing to break ground on single-family homes, Home Depot and Lowe's won't see a benefit until the market improves significantly. There's no reason to buy Home Depot or Lowe's right now. TheStreet.com Ratings grades both companies C, a "hold" recommendation. Hold off on these retailers until substantive growth returns to the housing market. TheStreet.com Ratings, recently cited for Best Stock Selection from October 2007 through February 2009 , is an independent research provider that combines fundamental and technical analysis to offer investors tremendous value in volatile times. To see how your portfolio can use this research, click here now!