Higher interest rates have pressured home sales over the last few years, which has weighed on the performance of housing stocks. But the tide appears to be turning.
"Homebuying momentum is building after nearly two years of suppressed home sales," said the National Association of Realtors Chief Economist Lawrence Yun. This is after pending home sales grew 2% in October -- the third consecutive month of growth.
Here are two stocks from the Dow Jones Industrial Average (^DJI -0.77%) that can not only benefit from a possible housing recovery in 2025, but also deliver solid returns over the long term, too.
1. Home Depot
Despite the downturn in housing, Home Depot (HD -0.58%) stock has held up relatively well over the last three years, but its 4% return at the time of this writing has underperformed the 24% return of the Dow Jones average.
Home Depot's growth has slowed. It reported a decline in comparable-store sales last quarter, with higher interest rates impacting consumers' appetite to spend on home projects. For the full year, management is guiding for total sales to grow approximately 4% year over year, with comp sales expected to be down 2.5% and earnings per share down 1%.
Home Depot's only slight decline in earnings in a challenging environment shows why it is a great long-term investment. The company has massive scale as the largest home improvement retailer. It generates a very high return on invested capital of over 30%, and management continues to see a lot of opportunity in a $1 trillion home improvement market.
Management is specifically focused on gaining wallet share of professional customers. One way it is doing this is getting closer to the customer. It has invested in expanding its supply chain with more fulfillment centers that can now reach 90% of the U.S. population with same- or next-day delivery.
The company's above-average profitability funds a generous dividend to shareholders. It declared a quarterly dividend of $2.25 per share in November, bringing its forward dividend yield to an above-average 2.12%. Home Depot has paid a dividend for 37 consecutive years, which speaks to the durability of the business through economic cycles.
The stock is fairly valued at a forward price-to-earnings (P/E) ratio of 28, but investors should expect accelerating growth in a housing recovery to lift the stock to new highs.
2. Sherwin-Williams
Sherwin-Williams (SHW -0.64%) stock has followed a similar pattern as Home Depot over the last few years. It dipped in 2022 with the housing downturn but has already started to climb toward new highs as Wall Street anticipates improving demand for paint.
Some investors may scoff at investing in a paint company, but you can sometimes find very rewarding stocks in boring industries. Over the last 10 years, Sherwin-Williams delivered a 352% cumulative return, more than doubling the return from the Dow Jones Industrial Average.
The company generated $23 billion in revenue over the last year, with most sales generated through its paint stores. Its consumer brands group and performance coatings for industrial markets posted a decline in sales last quarter, but stores are performing relatively well, with comp sales up 2.2%. Paint store sales have been stable in recent quarters.
"We continued to invest in the quarter to capitalize on what we see as unprecedented long-term share gain opportunity," Senior Vice President James Jaye said. Management is taking advantage of its competitors' struggles in a challenging environment to improve operations and digital capabilities to come out of the downturn in a stronger position.
Sherwin-Williams can invest in the future while maintaining stable bottom-line performance. For the full year, management expects adjusted earnings per share to be between $11.10 and $11.40, representing growth of 8.7% at the midpoint of guidance.
The stock is also not a bargain, trading at a forward P/E of 33, but this quality paint brand has rarely traded at a cheap valuation. It should deliver double-digit annualized earnings growth over the long term, which will translate to comparable returns for shareholders. Like Home Depot, it should be a solid performer as growth accelerates in a healthier housing market.
