(Home Depot article updated with stock price movement.)

NEW YORK ( TheStreet) -- Home Depot ( HD) continues to be the top pick in the home improvement sector.

The company was upgraded by Morgan Stanley to overweight from equal weight Monday, with Morgan Stanley conveying that it is optimistic about Home Depot's outlook going forward.

"We believe that the turn in housing is real. Our Home Improvement Lead Indicator has posted three straight months of gains -- the first such increase since 2006," the bank wrote in a note.

The increase in existing home sales is also a good sign that traffic should continue to drive same-store sales in 2010. Morgan Stanley is calling for positive comparable sales by the second quarter.

Home Depot has delayed expansion plans and recently announced it will lay off 1,000 employees.

Morgan Stanley also said it believes there is more margin upside to the market's expectations.

Last week, Goldman Sachs downgraded rival Lowe's ( LOW). The firm does see improving sales and earnings trends in the sector, but -- as with Morgan Stanley, believes Home Depot is the way to go on the turnaround.

Shares of Home Depot are climbing 3% to $28.83, while Lowe's is up 2.6% to $22.15.

-- Reported by Jeanine Poggi in New York.


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