Is Tractor Supply Company A Growth Stock That Deserves A Higher Multiple?

We recently compiled the list of the 9 Best Home Improvement Stocks to Buy Now according to the hedge funds using the latest sentiment data. In this article, we are going to take a look at where Tractor Supply Company (NASDAQ:TSCO) stands against the other home improvement stocks.

Home improvement stocks belong to those companies that are typically involved in the home improvement and construction industries. These firms make and sell products used by home owners, builders, and other construction professionals. Naturally, this means that their performance is dependent on the state of the housing industry and the economy - with robust economic growth and high spending allowing them to make more money and grow valuations

The real estate industry is dependent for the most part on interest rates. This is because higher rates mean builders and buyers find it harder to raise capital for their projects and purchases. So, it's natural that home building and home improvement stocks have fluctuated in 2024 as the market adjusts its interest rate cut expectations heading into the year's second half. To understand this performance, we can take a look at how pure play home building stocks have performed and whether their performance also tracks building materials and related stocks.

Indexes that track the former group are up by as much as 52% over the past twelve months as a housing shortage in the US coupled with a tight market created new demand for builders. In fact, these gains (from June 2nd, 2023) had stood at as much as 61% by March 21st when the Federal Reserve had indicated that it could announce as many as three interest rate cuts in 2024. Since then, these stocks have lost roughly 5% due to difficult to tame inflation which has toned down Wall Street interest rate cuts.

Similarly, and as we alluded to earlier, home improvement stocks have mirrored home building stocks. Indexes that track building materials and fixtures are up by roughly 49% over the past twelve months. They have mirrored home building stocks because the growing demand for houses and other buildings means that products such as flooring, plumbing, and piping also sell in higher quantities. Year to date though, and just like home building stocks, home improvement stocks have pared back some of their gains. The peak was on the 21st of March, and between June 2nd, 2023, and March 21st, the gains had stood at roughly 53%. And since then, these stocks have also shed roughly 5% of their gains.

Looking at this, it's clear that interest rates and home improvement stocks are as tightly linked as they can be. Therefore, the next important thing to analyze when it comes to these stocks is the current inflationary, interest rate, and broader macroeconomic environments. On this front, the close of May 2024 provided an important data set in the form of the personal consumption expenditure (PCE) index. The Fed's preferred inflation measure, data from the Commerce Department shows that the PCE rose by 0.3% in April, meeting economist estimates. On an annualized basis, this meant that inflation was at 2.7% in April, still higher than the Fed's goal of 2%, but the data was not a clear cut indicator for a rate cut.

This is because consumer spending, which determines how the economy will perform, slowed down to 2% in the first quarter after the previous reading of 3.3%. After the data release, trackers showed that traders were slightly more optimistic about a potential interest rate cut in September. These odds jumped to 53% after the data release, four percentage points higher than the previous reading of 49%. Crucially, the data confirmed that inflation is not permanent, and the Fed's two decade high interest rates are continuing to achieve their goal of tampering down prices. By June 2024 start, 47% of investors polled by the CME Fed Watch tool are expecting a 25 basis point cut in the Fed's September meeting.

One Fed official who would like to wait before cutting rates is the Minneapolis Fed President Neel Kashkari. In a recent talk with CNBC, the Fed official shared:

I don't think we should rule anything out at this point. We are all committed to getting inflation all the way back down to our two percent target. The most recent inflation print that we got on the CPI data was largely better than the earlier prints from the first three months. But still not where we needed to get to. So it wasn't getting worse, but we just need to wait and see. I think right now we're in a good position because the labor market remains strong in the US. So we have the luxury of being able to sit here until we gain confidence on where inflation is headed.

With these details in mind, let's take a look at some top home improvement stocks that hedge funds are buying.

Our Methodology

To make our list of the best home improvement stocks to buy according to hedge funds, we made a list of stocks that sell items such as home improvement equipment, paints, farming hardware, and others. Then we picked out those that had the highest number of hedge fund investors in Q1 2024. Why do we care about what hedge funds do. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).

Tractor in the field

5. Tractor Supply Company (NASDAQ:TSCO)

Number of Hedge Fund Shareholders In Q1 2024: 32

Tractor Supply Company (NASDAQ:TSCO) is a specialty tools and hardware company that sells products that are used by farmers. May 2024 was an important month for the firm as it saw Tractor Supply Company (NASDAQ:TSCO) open its tenth distribution center in Arkansas. Covering an area of 1.1 million square feet, the facility is the firm's largest to date and shows its faith in capturing more market share. Ahead of Tractor Supply Company (NASDAQ:TSCO)'s first quarter earnings in April 2024, Evercore ISI kept its Outperform rating on the shares and a $275 share price target. Evercore highlighted that web traffic and consumer data suggested that Tractor Supply Company (NASDAQ:TSCO) could grow its market share in the future.

As of Q1 2024 end, 32 out of the 933 hedge funds profiled by Insider Monkey were Tractor Supply Company (NASDAQ:TSCO)'s stakeholders. Robert Joseph Caruso's Select Equity Group held the largest stake which was worth $500 million.

Tractor Supply Company (NASDAQ:TSCO)'s price to forward earnings ratio is 27.55 which is higher than the market's 21. TSCO is one of the beneficiaries of the pandemic that haven't given back the gains the company made. TSCO shares have gained a stunning 210% over the past four years, which is considerably higher than the 37% revenue growth between 2020 and 2023. TSCO managed to increase its EPS from around $4.7 in 2019 to $10.09 in 2023. However, the meteoric rise in both revenue and EPS seems came to an end as analysts expect a 2024 EPS of only $10.38. Investors are paying a PE multiple of 27 for a stock that's growing its EPS by 3% now. Bullish investors believe that TSCO's 2024 earnings are temporarily depressed, and the stock will resume its growth once interest rates normalize. The company also believes that it is a "growth" stock because of the recent urban to rural migration trends. Here is what the company said in its earnings call:

"We do not see additional downward deflationary pressures in the current environment. The transition from an inflationary cycle to a disinflationary cycle is playing out as we anticipated. In spite of a very challenging housing market, we continue to see positive migration trends to our markets. While rural migration trends have moderated from the recent piece, rural America gained population in 2023. This marks the fourth consecutive year of growth in rural population. It is our view that the sensitive community found in our markets, and perhaps more importantly, the ability to secure a piece of property at a reasonable price has ensured the rural migration trend is one that’s here to stay for the time being."

We need to see more sustained growth from TSCO before getting bullish on the stock, but several hedge funds disagree with us. Overall, TSCO ranks in 5th place among the 9 best home improvement stocks to buy now. You can visit the 9 Best Home Improvement Stocks to Buy Now to see the other home improvement stocks that are on the hedge fund radar. While we acknowledge the potential of TSCO as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than TSCO but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. The article was originally published at Insider Monkey.