Lowe’s Just Became Wall Street’s Favorite Home Improvement Bet — and Home Depot Should Be Nervous

For years, Home Depot was the undisputed favorite of Wall Street analysts covering the home improvement sector. That era may be ending.

Telsey Advisory Group upgraded Lowe’s to Outperform from Market Perform on Monday, setting a price target of $295 — a move that reflects growing confidence in Lowe’s ability to close the competitive gap with its larger rival. Analyst Joe Feldman pointed to improving fundamentals, better execution under CEO Marvin Ellison, and a more favorable risk-reward setup compared to Home Depot. The upgrade came with a simultaneous downgrade of Home Depot to Market Perform from Outperform, with a $380 price target, as Yahoo Finance reported.

That’s a significant signal. Telsey has long been among the more measured voices covering retail, and for the firm to effectively swap its positioning on the two largest home improvement chains suggests something structural is shifting — not just a short-term trade.

The logic isn’t complicated. Home Depot shares have run hard, trading near all-time highs and carrying a premium valuation that leaves little room for error. Lowe’s, meanwhile, has been quietly delivering on its strategic plan while its stock has lagged, creating what Feldman described as a more attractive entry point for investors willing to look beyond the consensus pick.

And the consensus has overwhelmingly favored Home Depot. For years, institutional investors treated the Atlanta-based retailer as the default allocation in the space. Bigger pro business. Better same-store sales trends. A management team that could seemingly do no wrong. But that dominance in sentiment has priced in a lot of good news — perhaps too much.

Lowe’s has been making moves that deserve more attention. The Mooresville, North Carolina-based company has been reshaping its store operations, investing in its digital capabilities, and refining its approach to the professional contractor segment, which has historically been Home Depot’s stronghold. Under Ellison, who took over as CEO in 2018 after running J.C. Penney, Lowe’s has narrowed the margin gap with Home Depot and improved its inventory management considerably. The company’s total home improvement strategy — encompassing both DIY consumers and professional customers — has gained traction in ways that weren’t evident three years ago.

The timing of Telsey’s call matters. The housing market remains in a peculiar state: elevated mortgage rates have suppressed existing home sales, which historically drive renovation activity, but aging housing stock and homeowners sitting on substantial equity continue to support spending on maintenance and upgrades. Both companies face the same macro headwinds. The question is which one is better positioned when the cycle eventually turns.

Feldman’s view is that Lowe’s has more upside when that inflection arrives. Home Depot’s pro-focused strategy, anchored by its $18.25 billion acquisition of specialty distributor SRS Distribution completed in 2024, has been well-received but also well-priced into the stock. Lowe’s doesn’t need a blockbuster acquisition to move the needle — it needs continued execution on initiatives already underway, which is a lower bar to clear.

There’s also the valuation math. Home Depot trades at roughly 25 times forward earnings, a premium that reflects its market leadership but also limits the stock’s upside unless the company materially beats expectations. Lowe’s trades at a discount to that multiple, and any narrowing of the valuation gap would generate meaningful returns for shareholders even without heroic earnings growth.

So what could go wrong with the Lowe’s thesis? Plenty. The company still trails Home Depot in pro penetration, and closing that gap is a multiyear effort with no guarantee of success. Lowe’s also operates fewer stores — approximately 1,750 compared to Home Depot’s roughly 2,300 — which limits its addressable market without significant capital investment. And if the housing market deteriorates further, both stocks will face pressure, but Lowe’s higher exposure to the DIY consumer segment could make it more vulnerable to a pullback in discretionary spending.

But Feldman’s upgrade isn’t a call on perfection. It’s a relative value argument: at current prices, Lowe’s offers better risk-adjusted returns than Home Depot. That framing resonates with portfolio managers who’ve watched Home Depot’s stock grind higher and are looking for a way to maintain exposure to the home improvement theme without paying peak multiples.

The broader context adds another layer. The Federal Reserve’s interest rate trajectory remains uncertain, but most economists expect rates to come down over the next 12 to 18 months. Lower rates would unlock existing home sales, which have been frozen by the so-called lock-in effect — homeowners reluctant to sell because they’d be trading a 3% mortgage for a 7% one. When that dam breaks, renovation spending should accelerate. Both companies would benefit, but the stock that has more room to re-rate stands to gain more. Right now, that’s Lowe’s.

Wall Street’s shifting preferences between these two companies aren’t unprecedented. Analyst sentiment has oscillated before, typically tracking whichever company is demonstrating stronger operational momentum at the time. What makes this moment different is that the gap in execution has narrowed while the gap in valuation has widened. That disconnect is exactly what relative-value investors look for.

Home Depot isn’t suddenly a bad company. Far from it. The SRS Distribution deal gives it a deeper foothold in the professional market, its supply chain is among the best in retail, and its brand carries enormous weight with both consumers and contractors. Telsey’s downgrade to Market Perform isn’t a sell call — it’s an acknowledgment that the stock’s strong performance has pulled forward much of the near-term upside.

For Lowe’s, the upgrade represents validation of a turnaround story that’s been building for several years. Ellison’s strategy of simplifying operations, improving technology infrastructure, and building credibility with professional customers has been methodical. Not flashy. But effective. The company’s operating margins have expanded, its return on invested capital has improved, and its e-commerce business has grown significantly.

None of this means Lowe’s stock goes straight up. Markets don’t work that way, and the home improvement sector faces genuine headwinds from housing affordability challenges and uncertain consumer confidence. But the Telsey call crystallizes something that has been developing quietly: the investment case for Lowe’s is now at least as compelling as the case for Home Depot, and arguably more so on a risk-adjusted basis.

Investors who’ve been on autopilot with Home Depot may want to reconsider. The trade that worked for the last five years isn’t necessarily the trade that works for the next five. And in a sector where both companies sell largely the same products to largely the same customers, the stock that offers better value tends to win over time.

Lowe’s has earned a second look. Whether it earns a sustained re-rating depends on execution — but for the first time in a while, the market seems willing to give it the benefit of the doubt.