CREDIT SUISSE: There are 3 reasons why an activist investor could be interested in Lowe's (LOW, HD)

News that activist investor D.E. Shaw wants a potentially larger stake in
Seth Sigman, an analyst at Credit Suisse, sees additional upside for the home retailer, as there are three things that make the company attractive.
Relative to its rival

Investors should not underestimate the appeal of Lowe's after news that activist investor D. E. Shaw, a quantitative investment firm, has reportedly carved out a larger stake in the company.

After the news dropped on Friday, the home retailer's shares climbed 10% to $105.38 per share. Though the exact size of D.E. Shaw's investment is unknown, the investment company did disclose a 0.12% stake in Lowe's in a November filing, according to Bloomberg.

The move could be part of D.E. Shaw's plans to ask the company for changes that could increase shareholder value, according to unnamed sources in the Bloomberg report.

Credit Suisse's Seth Sigman outlines three reasons why the company could be attractive to activist investors. "We see additional upside to LOW, on the back of a possible activist investment," Sigman wrote in a note.

First, Sigman said that the company could be seen as a cheaper alternative to its rival Home Depot.

Sigman wrote that Lowe's' valuations are at a 10-year-low, and the valuation gap between Lowe's and Home Depot has widened due to Lowe's inconsistent results and lower comparable same-store sales from the previous year compared to its rival. Home Depot is also known as a "survivor" stock because it has shaken off natural disasters and competition from Amazon, which has pushed its valuation higher.

Moreover, the housing market is doing well, which should play to Lowe's favor, Sigman said. In addition to rising home prices and demand, home retailers have gotten a boost from Hurricanes Harvey and Irma last year because the people in affected areas will be looking to repair or rebuild their homes.

Finally, Sigman also views the gap between Lowe's and Home Depot's sales and margins as "addressable," in that it could be cyclical and strategic in nature, so that changes at Lowe's could reduce or close that gap.

Sigman has raised Lowe's price target to $116 a share, a 31% increase from his previous target of $88 a share.

Lowe's stock was trading at $102.98 per share on Tuesday, up about 10% this year. Home Depot's stock stood at $197.52 a share on Tuesday, and it's up 5.05% for the year.

Lowe's is expected to report fourth-quarter earnings on February 28. Home Depot will report on February 20. You can see when companies are reporting earnings on Markets Insider's earnings calendar.