Chart of the Day – $HD vs. $LOW on Talking Numbers on CNBC

1:24 pm EDT - November 19, 2012 By Enis

Here’s a preview of what I’ll be discussing on Talking Numbers today around 3:20 to 3:30 pm EST on CNBC:

After Hurricane Sandy, many pundits came out recommending the building materials stocks in anticipation of extensive reconstruction efforts. HD and LOW were at the top of that list.

We’re inclined to fade that enthusiasm in HD, as Dan laid out in his options trade last week. But on a longer-term basis, what do the charts say about HD vs. LOW?

First, the 20 year chart in HD:

If we look at the 20 year chart of HD, we can see a very similar rally in the past 4 years to what happened from 1995 to 1999. HD had a gradual, healthy, 3 year rally from 1995 to 1998, then a rapid 1 year rally from 1998 to 1999, in which the stock more than doubled.

This time around, HD had a gradual 3 year rally from 2008 to 2011, and then a rapid 1 year rally in which the stock has more than doubled in the past year.

The rapid 1 year rally in 1999 turned out to be the unhealthy, ending move, and I expect the current rally, predicated on multiple expansion, is an unhealthy, ending move as well.

Contrast that with the 20 year chart of LOW:

From 1995 to 1998, LOW had a tepid move, a slight rally in 3 years. From 1998 to 1999, it had a decent 1 year rally, but nowhere near HD’s steep ascent.

Similarly, LOW had a tepid rally from 2008 to 2011. In the past year, it has had a bigger gain, but nowhere near HD’s steep ascent.

In the long run, LOW ended up performing much better after its 1999 rally than HD did (as its valuation did not become as stretched), and I think today is a similar setup. I’d much rather own LOW than HD over the next few years.