This Analyst Sees a 17% Downside to Home Depot Stock. Here's Why.

Home Depot and Lowe's could be in for a rough year, with one analyst forecasting that the shares could lose more than 10% of their value.

Rising interest rates, persistent inflation, a weaker labor market, and the "bubble-esque appearance" of home- prices all point to the likelihood that home-improvement sales will decline in fiscal 2023 and 2024, wrote R5 Capital analyst Scott Mushkin.

Mushkin downgraded shares of both Home Depot (ticker: HD) and Lowe's (LOW) to Sell from Hold on Monday.

"This view is driven by our research that strongly points to meaningful real overconsumption of durables over the last several years, due to the pandemic and the large government transfer payments to households," Mushkin wrote in a research note. Now that the economy is poised to slow, those consumption trends could reverse, he added.

Neither company immediately responded to a request for comment.

The analyst is predicting comparable-store sales will turn negative for the home improvement sector by the second quarter of 2023, and remain weak throughout 2024. The slowdown in sales he predicted could drive down earnings per share, he added, weighing heavily on both companies' stock prices.

Home Depot looks "particularly vulnerable," Mushkin wrote. He sees room for Home Depot's stock to fall roughly 17%, while Lowe's could slide 10%, largely because Home Depot stock's valuation is relatively higher compared with Lowe's, making shortfalls in earnings starker. In addition, Lowe's management team is undertaking a series of company-specific initiatives, including expanding the Pro business and selling the company's Canadian operation , that could help offset some of the drag from lower sales.

Wall Street has steadily been growing more cautious on the home improvement sector as the housing market weakens. In December, Credit Suisse began coverage of both stocks, rating them at Neutral, arguing that economic indicators pointed to a softer environment for the sector.

But there are still plenty of bulls to be found. Home Depot, for instance, is a top pick for 2023 at Cowen , which argues that the company "exemplifies best-in-class retail execution."

Both stocks were largely unchanged on Monday. Home Depot was up 0.1% in late trading, while Lowe's closed down 0.5%.