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Saturday, September 23, 2006

Weekend Edition: The Shorts Run From Home Depot And Lowes

Stocks: (HD)(LOW)

Often when the shorts exist a sector, especially that large companies in a sector, it is a sign of a bottom in these stocks.

The New York Stock Exchange is out with its short interest for September. The No.10 and No.11 places for stocks with largest drops in shares short are Lowes and Home Depot respectively. Lowes short interest dropped over 5.7 million shares to 35.7 million shares. Home Depot short interest was down almost 5.1 million shares to 27 million. These are significant decreases.

The worst news may be out on the big home improvement retailers. At least the short community seems to be signaling that. After dropping from $43.95 in March, Home Depot hit $32.85 in August. It has staged a modest recovery to $35.85. Lowes hit a 52-week high of $34.85 last December. It dropped to $25.16 last month and now stands at $28.37.

But, some of the recent trends with the big companies have given weary investors some hope. Moody's upgraded the Lowes debt on August 29. Improved margins and operating cash flow drove the upgrade. A Morningstar analyst trumpeted the company's prospects in Forbes.

Home Depot is no longer taking quite the beating it has over CEO pay and a slowing housing market. Even Jim Cramer has stated that strong consumer spending will continues and Home Depot, among others, will benefit.

With commodity and gas prices dropping, consumers may feel that they can afford more trips to their favorite retailers. And, a better commodities pictures will help margins at both Home Depot and Lowes.

The shorts may be right.

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