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Stocks  | September 1, 2020

Pershing Square Capital Management recently released its Q2 2020 Investor Letter, a copy of which you can download here. The fund posted a return of 28.9% during the first half of 2020, outperforming its benchmark, the S&P 500 Index which returned -3.1% in the same period. You should check out Pershing Square's top 5 stock picks for investors to buy right now, which could be the biggest winners of the stock market crash.

In the said letter, Pershing Square highlighted a few stocks and Lowe's Companies Inc (NYSE:LOW) is one of them. Lowe's Companies Inc (NYSE:LOW) is a retail company specializing in home improvement. Year-to-date, Lowe's Companies Inc (NYSE:LOW) stock gained 36.9% and on August 28th it had a closing price of $165.51. Here is what Pershing Square said:

"Earlier this year, Lowe’s began to experience a significant acceleration in demand, as U.S. consumers in lock down began to invest more in their homes, which has contributed to Lowe’s year-to-date stock price increase of 40%. In recent months, Lowe’s sales have reflected unprecedented demand across the home improvement sector. Lowe’s has also benefited from actions taken over the prior year to improve the company’s competitive position, driving additional share gains.

Lowe’s second quarter results reflected extraordinary 35% U.S. comparable sales growth, substantial operating margin expansion, and robust earnings growth. While comparable sales growth has moderated somewhat in recent months, demand patterns continue to be well above historical averages. Although it is difficult to know how much longer the elevated demand environment will persist, we believe the pandemic has provided Lowe’s with a unique opportunity to showcase its improved merchandising, greater in-stock levels, and excellent customer service to a growing base of customers. This should drive greater customer frequency and loyalty, leading to correspondingly higher same-store-sales and profit margins over the long term.

In 2020, beyond adapting the business for surging demand and the associated operational strains imposed by Covid-19, Lowe’s continues to invest behind critical strategic initiatives, including improving omnichannel capabilities. Management completed the re-platforming of its ecommerce platform earlier this year, and will now focus on enhancing online features and functionality, thereby improving the overall user experience. Lowe’s is also accelerating investments in its supply chain initiatives, a critical element of the company’s longer-term business transformation. We believe that Lowe’s continues to make substantial progress toward achieving each of management’s high-priority initiatives, which will aid Lowe’s future competitive position.

In recent quarters, Lowe’s management has begun to acknowledge its medium-term 12% operating margin target as “not the end point,” but rather “a stop along [Lowe’s] journey,” and has further noted that they believe Lowe’s “can do better than that over time.” As Lowe’s revenue productivity and margins begin to approach its best-in-class peer Home Depot, which achieved a greater than 14% profit margin last year, it will generate significant increases in profit, which, when coupled with the company’s likely soon-to-be-relaunched, large share repurchase program should lead to accelerated future earnings-per-share growth.

Despite Lowe’s significant stock price appreciation, it currently trades at approximately 19 times our estimate of Lowe’s next-twelve-month earnings (vs. Home Depot at 25 times), a valuation which does not reflect its potential for significant future profit improvement. As a result, we believe that Lowe’s share price has the potential to appreciate substantially as the company continues to make progress on its business transformation."

In Q1 2020, the number of bullish hedge fund positions on Lowe's Companies Inc (NYSE:LOW) stock decreased by about 8% from the previous quarter (see the chart here), so a number of other hedge fund managers don't seem to agree with Lowe's growth potential. Our calculations showed that Lowe's Companies Inc (NYSE:LOW) is ranked #30 among the 30 most popular stocks among hedge funds.


A revolutionary initiative is helping average Americans find quick and lasting stock market success.

275% in one week on XLF - an index fund for the financial sector. Even 583%, in 7 days on XHB… an ETF of homebuilding companies in the S&P 500. 


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