Motley Fool Money - The Green Shoots in Home Depot’s Earnings

Episode Date: May 19, 2026

It may not look like much right now, but one small detail in Home Depot’s earnings report that should bode well for the beleaguered home improvement retail. We look at the company’s most recent results, whether the company’s stock looks attractive after a five year malaise, and what other companies in the housing and home improvement indsutryTyler Crowe, Matt Frankel, and Lou Whiteman discuss:- Home Depot’s earnings: The good and the “meh”- Home Depot Stock: value investment or value trap?- Are interest rates really the problem for housing?- Where to invest in the “coiled spring” of home equity- Mailbag: Reinvest dividends or put the money to work elsewhere?- Mailbag: Where to invest in green energy?Companies discussed: HD, LOW, TREX, RKT, TFSL, BN, CSIQ, FSLRHost: Tyler CroweGuests: Matt Frankel, Lou WhitemanEngineer: Dan Boyd Disclosure: Advertisements are sponsored content and provided for informational purposes only. The Motley Fool and its affiliates (collectively, “TMF”) do not endorse, recommend, or verify the accuracy or completeness of the statements made within advertisements. TMF is not involved in the offer, sale, or solicitation of any securities advertised herein and makes no representations regarding the suitability, or risks associated with any investment opportunity presented. Investors should conduct their own due diligence and consult with legal, tax, and financial advisors before making any investment decisions. TMF assumes no responsibility for any losses or damages arising from this advertisement. We’re committed to transparency: All personal opinions in advertisements from Fools are their own. The product advertised in this episode was loaned to TMF and was returned after a test period or the product advertised in this episode was purchased by TMF. Advertiser has paid for the sponsorship of this episode. Learn more about your ad choices. Visit ⁠⁠⁠⁠⁠⁠⁠⁠megaphone.fm/adchoices⁠⁠ Learn more about your ad choices. Visit megaphone.fm/adchoices

Home Depot and housing on today's Motley Fool Hidden Gems Investing. Welcome to Motley Full Hidden Gems Investing. I'm your host, Tyler Crow, and today I'm joined by the usual Tuesday crew. I've got Lou Whiteman and Matt Franklin, long-time full contributors here today. We're going to get into Home Depot's earnings, which reported before the bell today, as well as take a look at, I would say like a broader look at the housing industry in general, residential construction, building supply companies in general, because Home Depot is a great time to expand on this broader world that we see in the housing world because there are trillions

of dollars associated with a lot of financing opportunities. And of course, when we finish up, we'll get into the mailbag. But as I said, we're going to start with Home Depot's earnings. Shares are down about 1.37% as we tape after the company released its first quarter earnings. You know, it beat earnings and revenue estimates were better than expected. Revenue was up 4.8% year over year. But costs out. pace that. And earnings ended up doing a 4.3% decline on a per share basis. And, you know, S&P 500's down today. So you could say, yeah, it's just the market, I guess. It's not a big deal. But other than that, guys, what did you see maybe in the earnings or perhaps what you've been watching

with Home Depot in general and what were some of the takeaways? Lou, I want to start with you. Yeah. So down slightly now, half hour ago. I think it was 0.1% or so. So I think the market is yawning at this quarter, which, if we're honest, that's probably the right reaction. And you don't have to overreact every three months. But look, I will tell you, if you squint, if you really, really look carefully, if you really want to see it, there are green shoots there. There is potential signs of life here in a company that, you know, it's been a bad few years for, which is in terms of total spend. People are shopping less, but they are spending more. Average ticket increased by 2.2% even as transactions declined by 1.3%.

And purchases of $1,000 and more were up slightly. Now, look, it could be Glass Amfanti. That's just the impact of inflation versus people actually having an interest in bigger projects. But there's at least a glimmer of hope that we're not just buying petunias for the spring, that we're actually investing in our homes and doing bigger projects, which we haven't seen before. Lou, I didn't realize you were a big petunia guy. It's thinking of what the squirrels like the root, so you have to be careful with them.

Matt, what did you see when you looked at the earnings? Yeah, I mean, revenue growth was strong, like you mentioned, but it's also important to note that comparable sales weren't great. Most of the growth was, you know, new stores and things like that. Comparable sales were up just 0.4% year over year in the U.S., 0.6% worldwide, and that's after a 55 basis point currency tailwind. So people are still spending money on what they need for their homes. You know, some of, like Lou mentioned, purchases of $1,000 or more are up slightly. Some people have to spend that, and, you know, we're deferring maintenance, hoping the interest rates were going to come down. Consumer confidence is low.

Interest rates remain high. The housing market is still extremely slow, and very few homeowners are using their equity to finance projects. This has been going on with Home Depot for the past, I'd say three years at a minimum. And until we see significant improvements in home affordability, either in the form of prices coming down or rates coming down, down, I don't really see much changing here. I want to pull back the lens a little bit because, you know, pretty looking just at the quarter is pretty short term. Over the past five years, though, the shares of the Home Depot are roughly where they

were. I think it's maybe like up seven, eight percent over the past five years compared to a gain of 78 percent on a total return basis, so that includes dividends for the S&P 500. That level of underperformance, I don't think I've ever seen that, or I can at least remember when it comes to Home Depot. I mean, even during the dot-com bust and the Great Recession, Home Depot went down with the rest of the market. This has been one of those times of, like, divergence in the performance of Home Depot as a

business and as a stock. I'm not going to question that Home Depot is a quality business or not. This is, you know, the duopoly of home improvement, and it's been a wonderful business for going on almost I think more than 40 years now, at least as a publicly traded company. And there's obviously the argument like it could be the best this is ever going to go and maybe this is just an underperforming stock for here or maybe a short-term tailwind or headwind, excuse me, when it comes to Home Depot stock. So I want to ask this, is Home Depot a value investment or in the other term a value trap

where it looks cheap but you're probably getting underperformance because it's cheap for a reason. Yeah, so you correctly mentioned, it has really underperformed the market, but a few things to point out. So, number one, Home Depot is trading pretty in line with other, what I would call housing adjacent stocks over the past five years or so. If you back out the Mag 7 and certain other aspects of the AI trade, the S&P 500 is not up 78% over the past five years without those parts of the market that have been kind of divergent from everything. And lastly, five years ago, which was May 2021, we wrote what I would consider close to the peak of housing euphoria in the U.S. The average 30-year mortgage rate was about 3%. Prices were rising rapidly. So there was a lot of incentive to sell and buy and sell and buy and refinance. There was a lot of stimulus being injected into the economy.

So in short, the fact that Home Depot is flat versus exactly five years ago isn't that terrible considering the environment for housing, and interest rates and just consumer confidence now compared to then. So at the current price, Home Depot shares are roughly 30% below their high, which was reached in late 2024. And you're right, Tyler. We don't see this kind of underperformance from Home Depot often. Before this one, Home Depot has only experienced two 30% drawdowns in the past decade. One was a very quick blip during the initial COVID crash.

And the other was during that 2022 bear market when interest rates, went from 3% to 7% in a year. It's a rare discount. The stock trades for about 20 times forward earnings. It has about a 3.1% dividend yield. At some point, I don't know when, at some point, the real estate market will become more active. So I like the stock as a long-term investor here. Definitely value, not value trap. Basically what he said. Look, I'm going to take the over on how long that recovery is going to take. But the good news is, like Matt said, the recovery is not priced in. I don't see any reason to rush in at these levels. I don't think it's like you must buy now. I'm guessing we'll be buying at these levels for a while now, but you get the decent yield,

a good solid track record of declining share count. It's not on the top of my list to buy, but it's not a bad choice either. I wanted to talk Home Depot today, and I thought we was like, you know, we could go like one show where we don't mention the word AI once, but Matt had to ring the bell, so we did mention it, unfortunately. So I don't know, put the timer on eight minutes in. We're We're talking AI already. To the point about the dividend yield, too, Home Depot's dividend yield 3.1% is basically the highest it's been since the Great Recession. So keep that in mind when we're thinking about this as a future investment, those who are actually looking for income. Coming up after the break, we're going to take this discussion about the housing adjacent stuff that Matt was talking about and take a wider look at what's been going on in the housing market and what investors should be thinking about.

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built for you. As we were mentioning up at the top, Home Depot's performance as a stock has been indicative of what we've seen across the residential home, the residential construction market, basically anything that isn't tied to commercial and industrial development these days when it comes to construction. And that's been going on for several years now. Home sales and renovation rates have ground to a halt. And as Matt said in our previous segment, interest rates do have a big play in that. Interest rates today are considerably higher than they were during COVID and right after COVID. But it's at a level that is quite staggering. There's a great real estate blog is by Bill McBride. It's called the calculated risk real estate.

He puts out this amazing chart on housing starts, and it goes back for like almost 40 years. And right now, existing home sales in the United States are basically at the same pace they were during the financial crisis during like 2008, 2010 period, or as far back as the early 1990s, when basically the United States population was like 90 million fewer people than we have today. And yet home sales are right around that levels. So when I hear that, and we talk about interest rates as like the big culprit here, I almost feel like there has to be more to it, right? Like, is it just interest rates? Is it consumer sentiment? Like, what is driving this unprecedented low in, you know, home sales and renovations and all of these things?

So certainly interest rates aren't helping. But look, we're too far into this interest rate cycle. They've been where they are long enough now. everything normalizes, I believe that. So I don't think we can blame interest rates anymore, Tyler. I think you're right. And I don't blame the home builders either for those starts numbered because I, as someone who's sort of been poking around for real estate right now, it's amazing the way home builders are aggressively discounting the inventory they have. Why should they be starting more when they're doing that? What I think is going on here, I think you have to step outside of housing to really, really get the

explanation. Housing is just one part of a wider affordability crisis. I mentioned us on the podcast last Friday, but wealth and equality in the U.S. is currently at levels last seen in the 1920s. It's going to take more than shaving 100 or 200 basis points off the mortgage rate to change people's ability to buy houses. That's just, it's not an interest rate in it story anymore. We have a tend to focus on housing kind of with blinders on and see it just with moving rates, economic activity, just kind of seeing the world through housing and levers. I'm in the slower for longer camp because I think if you look outside of housing, outside of these levers, there are factors driving to slow down that I don't think interest rates or

anything the home builders can do. I don't think there's anything they can do to solve this. Yeah, I mean, it's a few different factors. Some of it was pulled forward demand during COVID, like you said. I know a lot of people who bought homes during COVID, myself included. And some is the fact that consumer sentiment is extremely low right now. I'm not sure if it's quite at an all-time low anymore, but it's pretty close. Interest rates being stubbornly high are certainly not helping. But there are some reasons to be positive going forward. So, for example, wage growth in the U.S. is currently outpacing inflation,

and it's significantly outpacing home price increases. Home prices rose on average about 1.3% in 2025. So affordability could improve even without meaningful changes in interest rates or home prices. So I believe that at some point, inflation will be brought under control and gravitate toward the Fed's 2% target, and interest rates will come down, not to the 3% mortgage rates we saw in 2021, but the 5% area is certainly realistic. And doing the math, a 30-year mortgage rate moving from 6.5%, we're roughly where it is now, to 5% is effectively a 15% discount on the principal and interest portion of a mortgage. So it would get many people who are currently stuck in place off the sidelines. I can see that certainly with like the wealth equality thing. It's certainly when I think about that, it's like the first time homebuyers, I think,

is a market that has been strained incredibly hard recently. And I don't see that changing a whole lot either. But to Matt's point, too, there is this portion of the market, like move up. and people changing houses and things like that, where there are also like weird signs of optimism. And this actually came because we were talking about Home Depot, I was doing some, looking at some previous conference calls and things like that. And this was a quote from Home Depot's CFO Richard McFall during their like analyst day call back in December. And I'm going to paraphrase a little bit, but basically like since 2019,

the value of housing stocks are grown over 60%. And home equity values have gotten even bigger because people have been paying down their mortgage. There's basically like $16 trillion worth of home equity that people could tap for various reasons, either to move up into a new home or to make that renovation that we're talking about. And the average home to loan value, you know, how much like outstanding mortgages people have, it's down at the 27% range. That is, I think, one of the all-time lows because we have a very, very high proportion of home sale or owned homes in the United States that are owned outright, that don't even have a

mortgage on them anymore, people who've lived on their entire lives. Not sure if they're going to leave, but it's certainly significant in terms of like how we think about the housing market in general. And with them sitting on, as McFall said, was like all this dry powder for use, you know, you could make the argument that there is this coiled spring for like renovations and spending and mortgage refinancings in the world of lower interest rates. I know there's other factories involved, but as to Matt's point, like a lowered interest rate would have a significant impact on this in the long run. And so in this scenario where you have this coiled spring of dry powder for renovations,

for people to make moves in their houses or something like that, thinking about this whole industry in general, what would you as an investor be looking at? Are there companies in particular, or is there sectors? Like, what would get you excited on this idea of playing a multi-year tail win for this industry? Yeah, so the one number I would give to sum up pretty much all of what you just said is $35 trillion. That is the estimated total of all U.S. homeowners' equity. That's by far a record high. That's roughly twice what we had going into the COVID pandemic. So I'm looking at companies in the mortgage space for refinancing. Rocket companies is a big investment of mine.

They're the number one consumer-facing mortgage lender in the U.S. I like companies that specialize in renovation products. Trex is one that's been on my list for a little while now. And I think that, you know, decking is a project that people often finance with home equity. But, I mean, honestly, that $35 trillion number, this is a big enough opportunity that there could be plenty of winners in both the financial sector and in the consumer discretionary sector that produces renovation-type products. So there's room for a lot of winners here. Yeah, I'm much more bullish on the idea that people with homes will invest in their homes

than I am bullish on the idea of an uptick in the housing market anytime soon. And it's back to that inequality thing. If we are in this K-shaped economy, the haves and the have-nots, one of the lessons of the last year is people who can spend continue to spend people with houses will continue to invest in their homes that is different from saying that people will be able to who haven't been able to buy homes will be able to so i do think yeah home depot outperforms the home builders for now i'll i'm honest to be honest i'm more interested in home depot or lows and something like treks i'd rather have broad exposure to than anything niche i think right now, but I do think, especially relative to housing, home improvement can work.

Coming up after the break, we're going to take investor questions. If you want to get your questions answered on air, go ahead and emails at podcasts at fool.com. That's podcasts at fool.com. The three rules we've always said so far is, one, keep it foolish, two, keep it short enough I can read it on air. And three, we cannot give personalized advice. So try to keep it to asking about an individual stock or what we, as investors would do rather than asking for personalized advice.

So Lou, Matt and I don't get in trouble with the SEC. And guys, I used to listen to a lot of classic rock radio, and they always used to do that double shot Tuesday sort of gimmick. So we're actually going to do two investor questions here because one's relatively short. I think they're good general kind of questions here. First one comes from Zach. And the question is, he wants to know what to do with dividends. Do you let them get automatically reinvested,

or do you prefer to have more control where they go and the timing of when you actually purchase stocks? Zach would like to know a discussion on dividends and all types of investments across, depending on the type of investment account would be really appreciated. Thanks. That's from Zach. So, Matt, what do you think? Reinvest or depends where it is, what kind of company? What do you say?

If you asked me a decade ago, my answer would be very different. So to be fair, dividend reinvestment used to be far more value. than it is today. Until about 10 years ago, fractional shares weren't widely available to trade through pretty much any broker I know, maybe Robin Hood. And you had to pay a commission on pretty much every single stock trade you make. At the time, I think my commission was $6.99 a trade, even if I was buying one share. So dividend reinvestment allowed you to skip those things. You could buy fractional shares, not pay commissions, and have all of your dividends put into new shares to continue to compound. Now, that's not an issue. So it's not quite as much financial.

no-brainer as it used to be. So with the account-by-account thing, so I still have my retirement accounts set to automatically reinvest dividends. That's where most of my dividend stocks are, first of all, like all my real estate investment trusts are pretty much in retirement accounts. It just makes it easier to compound your returns if you want to set like your retirement investments on autopilot. On the other hand, in my taxable account, I'm generally more actively looking for opportunities. I'm more likely to get into growth stocks. If I have any stocks linked to the AI trade, that's where they are. So I like to let my dividends accumulate for a while and have the ability to put them to work wherever I see the best long-term value. So between my two main types of accounts, those are just my preferences.

Yeah, I have no firm rules here. As Matt says, for most stocks, a dividend is window dressing. It doesn't really move the needle on your investment, whether you take the cash and deploy it elsewhere or add it. I will say I'm more thoughtful about it on those handful of stocks where there is a meaningful yield. TFS Financial is one example in my portfolio where you're getting 8%. As long as the yield is that high, I want to reinvest it and get more of that return. So I will think that there for the most part, I think the answer here is do what you want. Don't overthink it.

In terms of the account type, remember, you pay taxes on those dividends in a taxable account, even if they're reinvested. It's still a taxable event. So again, I think for the amount of words written about this, don't really think it moves the needle for an investor. So just do what feels right for you. There's like hundreds of like investor papers in like investor research that's been done on should you reinvest? Should you allocate the capital? What's the most tax sufficient? Do you know what it is for me? I'm pretty lazy and I just sometimes I want to sit on my butt so I just kind of like

let the dividends reinvest and I don't have to think that hard about them and still got a pretty decent return. Our second question comes from John Zengen's. Gurley, I hope I said that name right. And his question is more or less about green energy or alternative energy options here. It's for various reasons I'm very interested in moving past fossil fuels as an investor. What are some of the best ways to invest in green energy? Matt, why don't you go first? I feel like I have way more thoughts on this one, so I'll save mine for the end. Yeah, I was just going to say this question should have been directed to you. But I mean, the biggest play on alternative energy in my own portfolio is Brookfield Corporation,

ticker symbol is BN. They have their subsidiaries. They have Brookfield infrastructure or Brookfield Renewable Energy. They have a few different partnerships that have various investments in different renewable energy infrastructure. I'm generally more of a – I like investing in the tangible things, like the real estate, the infrastructure behind these plays. So that's the biggest play that I have.

But I'm curious to see what you're going to say because that's where I form my watch list on energy stocks anyway. Yeah, I think, I mean, look, I think, what, Tyler? How much is Canadian solar up since you mentioned it on this program? So that makes you the guru right there. But I kind of agree with Matt, just kind of with the Brookfields or whoever else. I don't want to be overexposed to one project or one technology. What I like about, like, the Brookfield approach, and there's others, too, not just

Brookfield, is that you get so much exposure and you have smart people minding the shop. in terms of what you have. That's kind of my way to go about it. But go ahead. Investing in alternative energy, at least for the previous 20 years, is kind of been a miserable experience because despite it being a rapidly growing industry, it's also fallen so far down the commodity curve and in terms of pricing that, you know, a lot of people can't make it because you've got to cut your costs so fast.

I think that dynamic's changing now with basically, again, we've got to ring the bell, AI infrastructure buildout, but like increased energy usage is. kind of changing the game in terms of electricity and pricing and all those things it's making basically almost anyone attractive these days. And to that point, solar power in general is doing incredibly well recently. In the United States alone, they're expected to install 56 gigawatts worth of new solar in the United States in 2026. And that's like, you know, compared to like, I don't know, these talks about nuclear, which maybe 10 years from now, we might get six gigawatts in new power. It's just moving that much.

faster. I think it's going to deploy incredibly well and probably solve a lot of the problems that we've said nuclear is going to solve in the coming years. So at least what I'm looking at it right now, I think there's some really good investments in solar power in general for solar and Canadian solar or two companies that come to mind. I think over the next couple of years, if the trends that we're seeing with power development and how that power is getting allocated across gas, solar batteries, all that stuff, I see utility scale solar. going to be one of the biggest winners. And so, yeah, for Solar Canadian Solar, it looked like two pretty attractive options right now. As always, people in the program may have interests

in the stocks they talk about, and the Motley Fool may have formal recommendations for or against. So don't buy yourself stocks based solely on what you hear. All personal finance content follows Motley Fool editorial standards and is not approved by advertisers. Advertisements and your sponsored content provide their informational purposes only. To see our full advertising disclosure, please check out our show notes. Thanks for producer Dan Boy and the rest of the Motley Fool team for Lou, Matt and myself, Thanks for listening, and we'll chat against it.