I'm readying for a home-makeover boom

Fidelity's Boris Shepov believes recent and upcoming interest-rate cuts in the U.S., among other factors, could set the stage for a surge in home improvement and furnishing stocks.

• The U.S. Federal Reserve's pivot to easing interest rates may provide some financial relief for consumers and help to stabilize the housing market, according to Fidelity Portfolio Manager Boris Shepov, who thinks these developments could ignite a rally in home improvement-related investments.
• "I believe we are approaching the early stages of a multiyear cyclical tailwind that should be supportive of home improvement and furniture-related businesses," explains Shepov, who manages Fidelity^® Select Retailing Portfolio.
• In helming the industry-focused portfolio, Shepov takes a long-term view to choose companies with underappreciated structural or cyclical improvement in earnings power and cash flow, especially those attractively valued relative to their peers, own history and the market. He prioritizes franchises he thinks will remain relevant across one or more of his key tenets of retail — value, convenience, selection and service.
• Because interest rates and, by extension, mortgage rates have risen so sharply since early 2022, existing home sales have suffered, Shepov notes. But with the cost of borrowing now easing a bit, he believes more people can afford to invest in their homes, potentially driving increased demand for home improvement services and products.
• He explains that the Fed's historic rate-hiking cycle, which began in March 2022, essentially froze the housing market because the switching costs associated with home transactions were simply too high, discouraging prospective buyers and sellers alike, causing them to remain on the sidelines.
• He notes that, given these headwinds, existing home sales, on a population-adjusted basis, recently reached a multi-decade low.
• "I believe we may be approaching an inflection point, however, as the housing market has shown signs of life after a period of stagnation," claims Shepov. "Home Depot and Lowe's report that housing-related fundamentals have stabilized."
• Seeking to capitalize on this shift, Shepov has owned several companies he considers potential beneficiaries, including Home Depot, Lowe's, RH, Williams-Sonoma and Etsy — fund positions as of February 28.
• High-end furniture retailer RH is particularly interesting to him because the firm boasts a strong brand, superior pricing power, a really good product cycle — including several new collections — and a unique shopping experience, all of which makes it competitively well-positioned. He likes the story even more given the recent pullback in the stock.
• Meanwhile, Shepov notes that home improvement giants Lowe's and Home Depot — two of his top holdings — continue to grow and dominate the market, taking share from local retailers while expanding their reach among professional builders and contractors.