The market has taken a walloping this week as investors are finally coming to the realization that the pandemic is here to stay, and cases are rising at a concerning rate. But there is a way to profit from this by investing in the market areas that could see gains in a spiking COVID environment.

While there a couple of areas of the market that could benefit from rising cases, such as in companies that make cleaning products, I believe the best industry to consider is in home improvement and renovation stocks such as Home Depot (HD), Lowes (LOW), Masco Corporation (MAS), and Stanley Black & Decker (SWK).

Market Commentary

The market is down today, with the three major indices in the red after a brief rally on Thursday. The SDPR 500 ETF (SPY) closed down more than 5% for the week.

Today’s drop can be attributed to big tech companies reporting earnings last night. While most beat expectations, the numbers weren’t enough to satisfy investors who have come to expect massive gains from companies whose shares they have driven up since March.

We are still in a period of heightened market volatility due to election uncertainties, no movement on a second stimulus bill, and rising cases of COVID. But this week, the latter has come to the forefront as cases are skyrocketing. If businesses need to return to lockdown, the economic recovery is in trouble.

Market Outlook

France and Germany announced partial lockdowns this week, as coronavirus infections skyrocket in Europe. Unfortunately, lockdowns might also occur in the US, as a new record of more 90,000 new COVID-19 infections was reached on Thursday.

I don’t see a fast recovery happening, especially with fiscal stimulus talks breaking down. If lockdowns do occur, we could be looking at increased job losses and, as a result, lower consumer spending. Once you add a possible contested election, we could see volatility and losses for a while. 

With that said, I do see one trend where investors can park their money as COVID-19 cases mount… home improvement stocks. These stocks have benefited from the pandemic as people are forced to stay at home. Over the spring and summer, it gave people something to do, but with colder months ahead, along with possible lockdowns, people will want to make their homes more livable as there will be nowhere else to go. This industry has also benefited from the boom in the housing market.

Here are my top four stocks to play this trend.

Home Depot (HD)

Home improvement sales are likely to remain healthy, and HD is the market leader in home improvement. The pandemic shifted consumer spending from restaurants and travel to home improvement projects, and HD has undoubtedly benefited.

The company has performed well over the past six months due to fundamental strength and better than expected results for its second quarter. Revenue grew due to the company’s technology infrastructure that allowed consumers to make purchases online. HD is expected to report its latest financial results on November 17th.

The stock is rated a “Buy” in our POWR Ratings system. The company holds grades of “A” for Trade Grade and Industry Rank, and “B” for Buy & Hold Grade and Peer Grade. It is also the #7 ranked stock in the Home Improvement & Goods industry.

Lowe’s Companies (LOW) 

Like its competitor HD, LOW is benefiting from a secular shift in consumer spending to the home. In the “new normal,” people have been forced to stay at home more than any point in their lives, which has led to increased investment in the home. People are remodeling kitchens, bathrooms and finishing basements.

The company outperformed estimates for the second quarter, as its improved technology infrastructure facilitated sales. Management is making further investments in its omnichannel capabilities to drive future growth. LOW is expected to report its latest earnings on November 18th. The company should continue to see growth into next year amid a growing housing market.

The stock is rated a “Buy” in our POWR Ratings system with a grade of “A” for Trade Grade and Industry Rank and a “B” for Buy & Hold Grade and Peer Grade. LOW is ranked #8 out of 69 stocks in the Home Improvement & Goods industry.

Masco Corporation (MAS)

Masco is a global leader in home improvement and building products. Its plumbing segment, led by the Delta and Hansgrohe brands, sells faucets, showerheads, and other related plumbing components. Its decorative architectural segment sells paints and other coatings under the Behr and Kilz brands.

Similar to HD and LOW, MAS has thrived in the COVID environment. The company reported earnings this week, and earnings increased 52.9% year over year, while revenue increased 16% to $2 billion. MAS saw strong growth in its Decorative Architectural Products and North American Plumbing segments. The company’s strong cash flow should support further investment in the business and return excess cash to shareholders.

The stock is rated a “Buy’ in our POWR Ratings system. It holds a grade of “A” for Industry Rank and grades of “B” for Trade Grade and Buy & Hold Grade. It is the #10 ranked stock in the Home Improvement & Goods industry.

Stanley Black & Decker (SWK)

SWK is a manufacturer of hand and power tools, and operates through three segments: tools and storage, security, and industrial. The company is benefiting from an increased interest in home improvement and strong demand for Tools & Storage in e-commerce purchases.

The company reports its latest earnings this week and beat the consensus earnings estimate by 8% with EPS of $2.89. That was a year over year increase of 35.7%. Revenues increased 6.1% year over year to $3.9 billion. Bottom line growth can be attributed to improved sales, cost-cutting measures, and lower taxes. SWK should continue to gain from its portfolio of do-it-yourself products, online shopping trends, and rising demand in the home renovation space.

The stock is rated a “Buy” in our POWR Ratings system. It has a grade of “A” in Trade Grade, Peer Grade, Industry Rank, and a “B” for Buy & Hold Grade. It is also the #9 ranked stock in the Home Improvement & Goods industry.

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SPY shares were unchanged in after-hours trading Friday. Year-to-date, SPY has gained 2.91%, versus a % rise in the benchmark S&P 500 index during the same period.

About the Author: David Cohne

David Cohne has 20 years of experience as an investment analyst and writer. Prior to StockNews, David spent eleven years as a consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers. More...

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