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The 2013 Retirement Portfolio Candidates: Home Depot

The company looks a little too pricey right now


With a new year in motion, I decided to rebalance my retirement portfolio. This includes taking cash that was added to my retirement account and finding some worthy candidates to add to it. Today, I’m looking at Home Depot (NYSE:HD).

Why this company? For a retirement portfolio, I tend to go with ETFs and mutual funds for large asset classes. However, I also want a few solid global juggernauts in there that I simply will not have to worry about … and that I think may give me years of either growth or dividends.

For Home Depot, I love that it has a footprint of 2,250 stores and hasn’t even expanded much on a global basis yet. Plus, I get what Home Depot is and what is does; it’s always nice to invest in what you know.

The one bummer about Home Depot is that it’s very sensitive to the economy — particularly housing — and I don’t want to wring my hands over a retirement investment.

When the housing market started to collapse in 2006, Home Depot’s earnings fell by 60% through 2008 and the stock’s price went from more than $40 a share on Jan. 1, 2006 to $18.51 in October 2008. Ouch.

However, the thing about a housing bottom is that speculators then buy into the distressed housing market and rehab houses to either flip or rent … and that sends those speculators to Home Depot. So there’s volatility, but what goes down has to come back up. The stock is now over $67.

And how are the company’s financials following the housing crash? Things look fine. The company carries $2.55 billion in cash against $10.77 billion in debt. Total debt service is at a blended rate of about 6.1%. TTM free cash flow is $5.1 billion. Overall, I’d say that Home Depot is on incredibly solid ground and survived the worst housing crisis in history with flying colors.

I can sleep at night with that track record.

Of course, as with all blue-chip stocks lately, the question rests on valuation. I’m willing to slightly overpay for quality, but I refuse to get hosed (so to speak). The stock, once again, is at about $67. Next year’s EPS is expected to grow from $3.04 to $3.48, or about 13%. Analysts project 16% annualized growth over the next five years.

Add in the 1.7% yield, then back out the 4% reduction in shares outstanding from repurchases. Using a 14x multiple, you get fair value of $49.

Is getting in at a price that is 30% higher than fair value the right play here? I’m not too keen on it. If it were 15-20%, then maybe I’d jump in. But I think I can find growth stocks without paying such a huge premium, even this is intended as a very long-term hold.

 As of this writing, Lawrence Meyers did not own a position in any of the aforementioned securities.

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