The firm's balance sheet, however, is very healthy, with great liquidity and no long-term debt. The fourth largest company in the industry by market cap is Builders FirstSource. This company has a stock price of $5.31. It has no P/E, since it is losing money. The company is focused on products for residential construction in the southern and eastern states, so the housing recovery needs to be in those regions for this company to benefit. The consistent losing of money, however, makes this company a risky investment, as does the high level of long-term debt. The beta is 2.3, which is highly volatile.

The fifth-largest company by market cap is Orchard Supply Hardware Stores, which is a California-based competitor to Home Depot and Lowe's. Its stock is priced at $10.11. The company lost $8.08 per share last year and is on a downward trend in revenue, gross income, operating income and net profit. This company is moving in entirely the wrong direction.

Overall, the best buy in this category is Home Depot. The stock price is relatively high, but that is the case for the top three firms in the industry. The bottom two are losing money and are on a downward trend. Home Depot has the best strategic position of the top three firms, while Lumber Liquidators has the best balance sheet. However, the superior diversification both of product lines and geography, along with the strategic advantages that go with being the largest company in a cost leadership category,...

Thus, while the sector itself is not attractive unless one believes that housing growth will be better than expected, we must choose a stock from this sector, and of the five largest stocks by market cap, Home Depot is the best one in terms of performance. Lowe's has inferior operating metrics to Home Depot, and Lumber Liquidators is a riskier firm that has seen its operating costs increasing at a faster rate than its revenues in recent years. Being the best-run company in the industry, Home Depot is in the best position to capture increases in the home improvement market.
Works Cited:

No author. (2012). How to value stocks. Motley Fool. Retrieved November 11, 2012 from http://www.fool.com/investing/beginning/how-to-value-stocks.aspx

No author. (2012). Stock-picking strategies: Introduction. Investopedia. Retrieved November 11, 2012 from http://www.investopedia.com/university/stockpicking/#axzz2Btw9KNL9

Skariachan, D. (2012). Permanent fix of U.S. housing to take time: Home Depot CEO. Reuters. Retrieved November 11, 2012 from http://www.reuters.com/article/2012/10/11/us-homedepot-ceo-plans-idUSBRE89A1M420121011

Yahoo! Finance. (2012). Home improvement stores. Retrieved November 11, 2012 from http://biz.yahoo.com/ic/736.html