Home Depot Inc (HD) shares have been hitting record highs this week, which should always cause any investor to look at whether it’s time to sell.
Even if it’s just taking profits on part of your position in Home Depot stock.
It’s not that there’s anything wrong with Home Depot’s operations. As a business, the top home-improvement retailer is thriving.
Home Depot Earnings
In its fiscal third quarter, Home Depot beat Street estimates on both revenue ($21.8 billion, ahead by $60 million) and earnings ($1.35 a share compared with $1.32 expected).
HD also boosted its fourth-quarter outlook and its outlook for the 2015 fiscal year, which ends in January. And Home Depot believes 2016 looks strong as well.
That helps explain why Home Depot stock, which closed Thursday at $126.86, is up nearly 21% this year after a 27.5% gain in 2014. Archrival Lowe’s Companies (LOW), which closed at $73.39 on Thursday, is up 6.7% for the year, after rising 39% in 2014.
If there are worries in the domestic economy — from which Home Depot generates more than 90% of sale — HD executives said they didn’t see them during Tuesday’s conference call. Business was good across the country in the third quarter, even in Texas, where the oil-price crash since June 2014 has hurt its energy industry.
Total transactions in the quarter hit 371.1 million, up 4.1% from a year. The average transaction was $58.03, up slightly from a year ago, and sales per square foot was $366.37, up 5.3% from a year ago. All product lines showed gains. Sales of equipment and furnishings for the kitchen are 10% of the total.
Where Things Start to Get Worrisome
OK, there is an issue for Home Depot: the high U.S. dollar. Home Depot generates 8.5% or so of sales in Canada and Mexico. The Canadian dollar is down 12.6% this year against the U.S. dollar after an 8.5% decline in 2014. And Home Depot sees the dollar’s appreciation cutting reported sales for fiscal 2015 by about $1.4 billion.
Home Depot’s fortunes move with the overall economy, which is growing. Home Depot is getting an additional quiet bump. While buyers of new homes are important customers, buyers and owners of existing homes are better. Owners of homes 45 years old or older spend 5.6% more on repairs than owners of homes that are 20 years old or younger, Chief Financial Officer Carol Tome said on Tuesday’s conference call.
So, the market is coming to Home Depot and Lowe’s. Some 40 million homes are older than 40 years.
But if things are so great, why should investors worry at all about Home Depot stock?
- Investors have a huge crush on it. Maybe too big. Home Depot stock has been on a fantastic tear since coming out of the 2008-2009 market crash — up nearly 605% from a closing low of $18 on March 6, 2009. That’s the fourth-best performance since the market bottom among stocks in the Dow Jones Industrial Average. Home Depot stock trails only those of Apple (AAPL), Walt Disney (DIS) and American Express (AXP). Home Depot is the fifth best Dow performer this year.
- Home Depot stock may be a bit pricey. Its trailing 12-month price-earnings ratio is 23.8, ninth highest among the 30 Dow stocks. The Dow’s overall P/E is 16; it’s 21 for the Standard & Poor’s 500 Index. Home Depot’s forward P/E is 20.6. And let us look at its performance over the last five years. Home Depot is up 309%; Lowe’s is up 230%.
- Home Depot hits new highs and falls back. This occurred on Wednesday and again on Thursday. That suggests some investors want to lock in profits as soon as they can because they worry gains may be limited. But it will take a little time yet for such a trend to be evident.
- A concern about earnings growth. Analysts see Home Depot earnings growing 15.3% this year and 15.6% in 2017. But sales are projected to grow only 5.7% this year and 5.5% in 2016. This assumes no changes in foreign-exchange rates and a continuing benign interest-rate environment.
- How fast will the Federal Reserve raise interest rates? The Federal Open Market Committee, the Fed’s rate-making group, will probably start to boost its target range of 0% to 0.25% to something like 0.25% to 0.5% in December. It may decide on additional rate hikes later.
Let’s play out what could happen.
What Could Happen to Home Depot Stock
For Home Depot stock to crash, you need a major economic catalyst. HD shares fell by as much as two thirds in the 2000-02 crash (set off by the dot-com bust and the Sept. 11, 2001, terror attacks) and 57% between 2007 and 2009, where the big culprit was the housing bust.
So far, despite the constant warnings of perma-bears of a catastrophic market fall, a catalyst for a crash that could hit Home Depot (and, obviously the entire stock market) has not emerged.
Click to Enlarge If that’s the case, a decline in Home Depot’s stock could be modest. HD could fall to its current 200-day moving average of $115.50, but the average has acted as a powerful support level. In fact, Home Depot shares has not traded below its 200-day MA since the summer of 2014.
In the selloff this past August, HD stock kissed its 200-day MA and promptly rallied.
In addition, Home Depot has mostly traded above its 50-day MA — a key level of investor confidence.
Home Depot stock’s 14-day relative strength index, a measure of momentum, is 66 now. If the RSI, which you can find in the charting tools on Yahoo Finance or other sites, tops 70, thinking about selling is a good idea. Above 75, the question becomes more urgent.
The bottom line is this: Investing in a stock requires good timing when you buy and equally good timing when you sell. One could safely defend a sell decision on Home Depot stock now, let the shares fall and buy them again later.
A decision to wait is not crazy, but it does require monitoring because, some day, HD is going to drop back.
As of this writing, Charley Blaine did not hold a position in any of the aforementioned securities.
