The Home Depot, Inc. (HD), Lowe’s Companies, Inc. (LOW): Are Housing Stocks Overpriced?

Lumber Liquidators, on the other hand, is relatively immune to the intense competition that The Home Depot, Inc. (NYSE:HD) and Lowe’s must face. As the largest U.S.-based retailer of hardwood flooring, Lumber Liquidators sells its products at a price few competitors can match.

Sales, and the company’s stock price, have increased dramatically alongside the recovery in housing. Management forecasts $913 million to $942 million in sales for 2013 — 12% to 16% growth compared to 2012.

But Lumber Liquidators is no different than The Home Depot, Inc. (NYSE:HD) and Lowe’s in the sense that its prospects have brightened, but its stock price has run up much higher than its normal earning power is worth.

Priced for suckers

Over the last four quarters, Home Depot has earned $3.91 per share in free cash flow — far higher than it has earned in the last decade and much higher than its normal earning power. The stock recently traded around $80 per share, so investors are getting a 4.9% initial yield ($3.91/$80) based on inflated earnings. This means that if Home Depot can pull off a miracle and routinely earn about $4 per share from here on out — a virtual impossibility — shareholders will get a 5% compound annual return.

Lowe’s also recently reported record free cash flow per share; in its fiscal year ended January 2013, Lowe’s earned $2.21 per share in free cash flow — a 5.3% yield on its recent stock price.

For Lumber Liquidators, I will give it the benefit of the doubt and use the higher GAAP earnings figure to calculate its earning power. The company earned a record $1.96 per share over the last four quarters — a 2.4% earnings yield.

Bottom line

Short-term momentum traders may be able to buy these stocks and flip them to a greater fool, but long-term shareholders need to understand that they are the fool if they buy any stock with a maximum upside of 5%. Home Depot, Lowe’s, and Lumber Liquidators are all trading at rich multiples of record earnings — long-term investors should avoid them.

The article Are Housing Stocks Overpriced? originally appeared on Fool.com.

Ted Cooper has no position in any stocks mentioned. The Motley Fool recommends Home Depot, Lowe’s, and Lumber Liquidators. The Motley Fool owns shares of Lumber Liquidators. Ted is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.