Lender Shortage Impeding Housing Recovery: Citigroup Inc. (C), Bank of America Corp (BAC), Lowe’s Companies, Inc. (LOW)

Stocks To Avoid

As a speeding housing recovery is obstructed by the imbalance of supply and demand for mortgage, companies that provide home improvement products, building materials and supply makers will experience a slowdown. Therefore, you should avoid The Home Depot, Inc.(NYSE:HD) (NYSE:HD) and Lowe’s Companies, Inc. (NYSE:LOW).

Lowe’s Companies, Inc. (NYSE:LOW) is a home improvement retailer offering a range of products for repair, remodel and home decorating. Lowe’s reported solid fourth quarter results which were also in line with the company’s 5-year plan. During the quarter, sales accelerated, gross margin turned positive while the management confidence increased. Comps increased 1.9% while gross margin expanded by five basis points, below the third-quarter 15-basis-point expansion.

Lowe’s Companies, Inc. (NYSE:LOW) management expects the comps to grow by 3.5% during 2013. However, I believe the company’s growth will actually slow down, as a lack of mortgage lenders leads to fewer home sales.

Home Depot is a similar home improvement retailer which sells an assortment of building materials, lawn and garden improvement products and a variety of other services. During the fourth quarter, HD reported 19% growth in its EPS. HD delivered another strong quarter due the impact of one extra week and China closure. I expect less upside in Home Depot upcoming quarter’s results.

An expected slowdown in housing can bring meaningful downside to the $3.37 EPS guidance.  Besides, the tailwind from Sandy is expected to further compress the company’s gross margins. According to Reuters, a majority of the analysts already have a hold rating for the stock, while one recommends its investors sell the stock.

Conclusion

I recommend investors stay away from Home Depot and Lowe’s until a balance in the supply and demand dynamics for mortgages is reached, causing the mortgage rates to stabilize.

The article Lender Shortage Impeding Housing Recovery originally appeared on Fool.com and is written by Adnan Khan.

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