Uncovering a Hidden Gem in the Home Improvement Space
If I could turn back the clock 40 years, I’d invest in The Home Depot (NYSE: HD) without hesitation. The company revolutionized the home-improvement industry with its massive stores offering an unparalleled product selection, leading to rapid expansion to over 2,300 locations today. A $10,000 investment in The Home Depot stock 40 years ago would be worth a staggering $15 million today, with reinvested dividends pushing that figure to over $25 million.
A New Contender Emerges
Fast-forward to the present, and The Home Depot’s stock is trading near its all-time high of over $415. While its long-term returns have been impressive, they’ve slowed down in recent years. The company’s total return over the last five years stands at 112%, a solid result but dwarfed by the 147% gain of flooring specialist Floor & Decor (NYSE: FND) over the same period. This lesser-known stock is poised to outperform The Home Depot over the next five years, and here’s why.
Growth Opportunities
The Home Depot’s investment thesis relies heavily on its profit margins and returns to shareholders, given its limited scope for top-line growth. With only 55 net new store openings over the last five years, representing a mere 2% growth, the company’s opportunities for expansion are restricted. In contrast, Floor & Decor has plenty of room for improvement, making it an attractive alternative.
A Path to Top-Line Growth
Floor & Decor’s strategy for growth is straightforward. With 241 locations currently, the company plans to end the year with around 250 and open 25 more next year, representing 10% unit growth. Its long-term goal is to operate 500 stores across the country. Although same-store sales have dipped recently, likely due to a weak housing market, the company has a strong track record of 14 consecutive years of gains. As the housing market recovers, same-store sales should rebound, boosting profit margins.
A Compelling Investment Case
Between new store openings, same-store-sales growth, and profit margin expansion, I believe Floor & Decor will outperform not only The Home Depot but also the S&P 500 over the next five years. With its stock already up 147% over the last five years, this little-known business is primed for continued success.
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