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Tuesday, July 25, 2006

Investor Shift Bets From Lowe's To Home Depot

Stocks: (LOW)(HD)

Wall Steet is shifting its bet from Lowe's to Home Depot in the big war between the home improvement stores. July short interest in Home Depot dropped 12 million shares to 65.8 million. Lowe's short interest rose to 40.7 million, an increase of 6.9 million shares. Home Depot trades an average of 13.2 million shares a day, and the average at Lowe's is 8.2 million.

There may be good reason for the shift. Lowe's trades at a price to sales ratio of one times. Home Depot's is .85. The issues that might hurt each stock are common to both. Fuel prices. A slowing home building market. Competition from Wal-Mart.

For the quarter ending May 5, Lowe's had revenue of $11.9 billion which was up 10% over the immediately previous quarter. For the same two periods, operating income rose 20% to $1.4 billion. At Home Depot, the quarter ending revenue for the quarter ending April 30 was up to $21.5 billion, and increase of 10% over the immediately previous quarter. Operating income rose 18% to $2.4 billion. Not much difference in growth rate.

Seeing a shift in short positions between two companies that compete directly with one another is often a telling sign. And, if Home Depot's price to sales ratio was the same as Lowe's, it would trade close to $40 instead of $34.60. Sort of makes you think.

Douglas A. McIntyre can be reached at He does not own securities in companies that he writes about.

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