(FORTUNE Magazine) – Underpromise and overdeliver: It's a classic management tactic that has played out exceptionally well for the team at Home Depot (HD, $36) in the past year--and for the company's shareholders. Despite a seemingly dire outlook 12 months ago, the stock price of the country's largest home-improvement retailer has soared by 57%. Meanwhile the stock of archrival Lowe's (LOW, $56), a potential victim of HD's resurgence, hasn't exactly stalled. It's up a hefty 44% over the same time frame. Although no one is expecting a repeat of those outsized returns in 2004, most analysts are now bullish on both do-it-yourself giants.

Home Depot has gone from fixer-upper to model showcase in record time. Mainly because of HD's size--as of late February it had 1,707 stores to 952 for Lowe's--it's growing more slowly than its rival. In early 2003 the pace appeared to be slackening at an alarming rate. Management announced that 2003 earnings growth could well be half that of the previous year. The company said same-store sales--a critical retail performance indicator--for the fourth quarter of 2002 had plunged by 6%, the most significant drop in the company's history. And big-bank analysts even slapped sell ratings on the stock. We at FORTUNE recommended that investors might be better served buying the company's products rather than its stock (see fortune.com).

Well, we were duped. As it turns out, Home Depot's products did indeed fly off the shelves, and at a much brisker pace than most observers had predicted. By the second quarter of 2003 same-store sales had turned back into positive territory, as CEO Bob Nardelli's ambitious program of refurbishing older stores began to pay big dividends.

The sales boost plus improved efficiency led the way to a string of quarterly earnings announcements that came in substantially above analysts' expectations. In February the company reported fiscal 2003 earnings of $1.88 a share--a 20% increase from the previous year. The stock now trades at a P/E of 19, well below the S&P 500's ratio of 24, and HD is forecasting earnings growth in 2004 of 10% to 14%. "Investors should begin to recognize a pattern from Mr. Nardelli: He delivers more than promised," writes UBS analyst Gary Balter in a recent research report.

For its part, Lowe's is forecasting total sales growth of 17% in 2004, as the company opens 140 new stores. At the current price, the stock is trading at 21 times 2004 projected earnings--very reasonable, say observers, for a company with Lowe's growth potential and strong balance sheet.

Both Lowe's and Home Depot are vulnerable to a slowdown in the housing market. But research indicates that consumers typically spend money on home improvement at least two to three years after a purchase. And Citigroup analyst Bill Sims points out that a nationwide contractor shortage has created a nine-to 12-month backlog in home-remodeling projects, which bodes well for ongoing sales. Looks as if Home Depot and Lowe's are still capable of overdelivering to investors.