Cramer Says Home Depot (HD) Needs Lower Rates to Recover

Jim Cramer identified The Home Depot, Inc. (NYSE: HD) as a primary laggard in the Dow Jones Industrial Average, attributing the stock's decline to high interest rates rather than fundamental weakness. In an October 1 discussion, Cramer noted that the Dow's constituents finished the third quarter down 2.7%, with Home Depot falling 19% and McDonald's dropping 15%. He described Home Depot as a "bad pick" for his Charitable Trust but refrained from selling the position, stating that the company remains a "hostage to interest rates" and will not see relief until borrowing costs decrease.

The valuation gap between Home Depot and its primary rival highlights the market's hesitation. The stock trades at approximately 19 times forward earnings, a premium of roughly 27% over Lowe's Companies, Inc. (NYSE: LOW), which trades at 14.6 times. This disparity persists despite Home Depot's recent financial performance, which showed resilience in specific areas during the second quarter.

Home Depot reported second-quarter sales of approximately $47.9 billion, a 5.7% increase year-over-year. Comparable sales rose 1.7%, with 1.3% growth in the United States, while adjusted diluted earnings per share climbed to $4.92 from $4.68. The company maintained its fiscal 2026 forecast, projecting total sales growth between 2.5% and 4.5% and comparable sales growth ranging from flat to 2%. Adjusted earnings per share are expected to increase between zero and 4%.

Management attributed the sales resilience to continued spending on smaller home improvement projects and progress in the professional-customer segment. Pro comparable sales outperformed the do-it-yourself business, and online comparable sales grew 11%, marking a fifth consecutive quarter of double-digit growth. Approximately 90% of stores had completed a sale through SRS during the preceding 12 months, indicating successful integration into sales channels.

However, the housing backdrop remains a significant obstacle. CFO Richard McPhail described housing turnover as historically low relative to the housing stock on the earnings call, noting there was no sign of a turning point at that time. Affordability concerns and consumer uncertainty continued to weigh on larger projects. The composition of sales growth also shifted, with comparable transactions declining 1% while the average comparable ticket increased 2.8%. This means higher spending per transaction supported overall growth despite fewer total transactions.

Cost pressures further complicate the outlook. Management anticipates that IEEPA tariff refunds will help cover unexpected increases in fuel, energy, and other input costs. Consequently, sustaining the current earnings projection requires careful expense management alongside continued sales performance.

Investor positioning remains largely stable according to Insider Monkey data. In the second quarter, 98 hedge funds held shares of The Home Depot, down slightly from 100 in the first quarter. Fisher Asset Management held the largest stake with 10.36 million shares among the tracked funds. Short interest represented 1.18% of the public float as of mid-September, indicating limited bearish positioning through short sales.