Stock Showdown: Home Depot vs. Lowes

03/30/2011 7:00 am EST

Focus: STOCKS

Home Depot and Lowes are clear-cut leaders in the home improvement retail space, but a look at the charts reveals that one company’s stock has a much stronger foundation than that of its counterpart.

Home Depot (HD) announced a stock buyback after the close on Monday (Mar. 28) and was trading higher in the after hours session. The news must be good for the stock, right? Is this a good time to buy the stock? Not so fast.

Buybacks can be interpreted in many ways. Short term, they may pop the stock price because there are fewer shares outstanding, but longer term, it can signal that a company sees no opportunity to put their cash to use, a negative for the stock price. So what is it in this case?

The technicals can give some clues. Look at the chart of HD below. It is in a long-term uptrend but looks to be getting a bit tired. Despite the rising simple moving averages (SMAs), the 20-day SMA has just started to roll down.

chart
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The relative strength index (RSI) is crossing below the midline and the Moving Average Convergence Divergence (MACD) indicator is flat lined. This is all happening at the 100% retracement of the fall from the highs in 2007 at 36.97.

Also notice that it has not retaken the top in February after the two recent attempts and has put in lower lows each time.

Yesterday (Mar. 29), it closed under both the 20- and 50-day SMAs, possibly indicating more downside.

The price action was suggesting weakness. If it can get above the February high of $39.11, making a new higher high, then this view can be reversed. It is no-man’s land in between.

As an alternative and comparison, let’s take a look at the chart for Lowes Companies (LOW) below:

chart
Click to Enlarge

LOW has many similar features in its chart, which is to be expected in the same industry group. The RSI is falling toward the midline and the MACD is flat lined.

But notice the differences. The RSI has not fallen below the midline all year. All of the SMAs are rising including the 20-day SMA, and the stock price is above all of the SMAs.

Also, during its run higher from December, it has continued to post higher highs and higher lows. There is no doubt that the trend is still up in LOW.

So Home Depot may be giving current shareholders a short pop (or opportunity to get out), but from a technical perspective, Lowes is a better place to put your money.

By Greg Harmon of DragonflyCap.com

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