We started buying Home Depot stock last week as a play on housing and interest rates. Our initial purchase of 50 shares was approximately $362. We bought 50 more shares on Wednesday, a few dollars higher. The Dow has had a mixed year — up about 7% compared with the S&P 500’s more than 16% gain. After rallying to $395 in March, when the market expected as many as six Fed rate cuts this year , Home Depot then traded as high as $325 in May as investors reset expectations lower. Home Depot has finally started to bounce back in recent months after bond yields fell on a series of softer inflation prints with resilient economic data. Still, the stock is well below its 2021 close of $415 a share, when everyone is nesting during Covid. The peak was reached just months before the Fed’s March 2022 rate hike cycle begins to combat rising inflation. With the Fed widely expected to cut rates at its upcoming meeting in September, we wanted exposure to quality companies like Home Depot that have been disrupted in this high-rate environment but will see their industries improve as the borrowing costs. Our Home Depot investment thesis is about growing residential turnover, the home improvement retailer’s main driver of sales. In previous cycles, the mortgage rate range where you typically start to see the big increase in turnover has been around 5% to 6.5%. The next cycle should be no different. We’ve already seen some confirmation that mortgages below the 6.5% level are where activity is picking up, CEO Ted Decker said on the company’s second-quarter earnings call in August. When interest rates fell below 6.5% towards the end of last year, he explained, there was an immediate increase in housing activity, mortgage applications and mortgage refinance applications. HD YTD Mountain Home Depot YTD So where are we today? Mortgage rates fell for a sixth straight week last week to 6.29% from 6.43%. And, what did we see? A weekly increase of 1.4% in total mortgage demand and a 1% increase in refinancing applications. It’s not a lot of activity, but it shows that the trend is going the right way. Mortgage rates are still at the top end of the aforementioned range. People are waiting for the biggest drop. We may not be that far off. Mortgage rates with a 5% handle could be on the horizon, at least that’s what Toll Brothers CEO Doug Yearley thinks. He said Wednesday on CNBC’s “Squawk on the Street” that the 30-year fixed-rate mortgage could fall below 6 percent if the Fed cuts three times in the fall. Once mortgage rates have a handle of 5%, the housing market could take off. To be sure, a drop in mortgage rates won’t improve Home Depot’s business overnight. There is usually a delay of a few months because it takes time to close on a house and then figure out what projects you want to do. However, if Yearley is correct, then it won’t be long before mortgage rates are in a sweet spot where housing turnover really starts to pick up, making now the time to start buying Home Depot. The knock against retail right now is that the US consumer is on shaky ground, but housing is a different animal because rising home values tend to drive Home Depot sales. As Decker pointed out at an investor conference last week, home equity values have risen nearly $18 trillion since the end of 2019, and the available equity for a HELOC, a home equity line of credit, is about $11 trillion. With these numbers, it’s easy to see why Decker is optimistic that activity will normalize and that housing turnover and remodeling activity will pick up again. For now, however, Home Depot is still experiencing comparable sales declines, and the Street doesn’t expect a return to growth until the middle of next year. But we want to get ahead of the curve. It’s similar to what we’re seeing right now with Club Best Buy , which is now heavily concentrated in quarterly reports in anticipation of a return to annual sales growth. One question you may ask is why Home Depot over archrival Lowe’s. We think both stocks can work on that thesis, but we like Home Depot because it has more exposure to professional customers and less to do-it-yourself shoppers. Earlier this year, Home Depot boosted its Pro business with the more than $18.25 billion acquisition of SRS Distribution, a professional building supply outfitter specializing in pools, landscaping and especially roofing. Management believes this deal increased its total addressable market by $50 billion to $1 trillion. Another reason to buy Home Depot stock: Falling interest rates will make dividend-growing stocks like Home Depot look more attractive to income-hungry investors. The stock currently has a dividend yield of nearly 2.4%, and that pays us as we wait for mortgage rates to fall. The company has historically been an active buyer of its stock, but buybacks are on hold until 2026 because it financed the SRS acquisition with $10 billion in bond issues. We have a price target of $420 per share on the stock and a buy-equivalent rating of 1. (Jim Cramer’s Charitable Trust is big HD, BBY. See here for a full list of stocks.) As a subscriber to the CNBC Investing Club with Jim Cramer, you’ll receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a share in his charitable trust portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after the trade alert is issued before executing the trade. THE ABOVE INVESTMENT ASSOCIATION INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, ALONG WITH OUR DISCLAIMER. NO OBLIGATION OR OBLIGATION OF CONFIDENTIALITY EXISTS OR IS CREATED BY YOUR RECEIPT OF INFORMATION PROVIDED IN CONNECTION WITH THE INVESTMENT ASSOCIATION. 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