Home Depot Inc (NYSE:HD) has been a consistent winner. HD stock price is up 30% this year, 34% over the past 12 months and 170% over the past five years. Should investors take gains or stay on the bull train?
The latter is most applicable, assuming you’re a long-term investor. If one were to book some profits or sell a few upside calls vs. their position, that is justifiable. However, there’s no reason for this secular winner to stop winning and therefore we should stay long. Here are three reasons why.
HD Stock Holds Up Against AMZN
One of the most unique things about Home Depot and Lowe’s Companies, Inc. (NYSE:LOW) is that they can hold their ground against Amazon.com, Inc. (NASDAQ:AMZN). In a day and age where e-commerce is quickly sinking the ships of Macy’s Inc (NYSE:M), J C Penney Company Inc (NYSE:JCP), Sears Holding Corp (NASDAQ:SHLD) and many more, LOW and HD are doing fine.
In fact, HD is doing better than fine. Last quarter the company reported earnings of $1.84 per share on revenue of $25 billion. Sales climbed 8% year-over-year while earnings ballooned 15%. Even more impressive? Comparable-store sales results came in at a blistering 7.9%.
Can I buy a DeWalt drill, chop saw or tile cutter on Amazon? Yes, I can. And to some extent, that has to eat into Home Depot’s sales. But what about Christmas trees, spring flowers or vegetable plants? By and large, customers will keep going to Home Depot.
Contractors need constant supplies — lumber, pipes, sheetrock, plywood, etc. They’re not going to wait a day or two to get them from Amazon, if it even sells it. Heck, even average Joes working on a home project won’t postpone it for each setback they face. They’re going to run up to Home Depot a few times on a Saturday or Sunday and get what they need.
And since they’re not all experts, it helps being able to talk to employees about what wattage to use or what tools might be needed for the job at hand. Bottom line is, Home Depot has a place in the future of retail and there’s not much Amazon can do about it. At least not as quickly as it’s destroying other industries in retail.
Housing Market Boosts HD Stock
So what’s driving all these customers to hire contractors or take on home renovation projects of their own? A stronger economy and an improving housing market helps. As home values across America rise and as the economy strengthens, consumers are increasingly looking to own more homes.
Some are looking to renovate, while others are looking to flip. Some may just want a more valuable home and finally have the money for that new kitchen, deck addition or finished basement. Whatever the project, the catalyst is the same: Our bank accounts are growing and the economy is more secure. That’s boosting the housing market and home spending.
Floods, Fires and Hurricanes Also Lift HD Stock
An unfortunate but true catalyst to HD stock price has been natural disasters — be they the hurricanes that ravished Texas and Florida, the forest fires out West or bulking up on generators and flashlights before a big blizzard.
Rebuilding or making a home habitable again takes lots of money. Unfortunately, many victims don’t have a choice. Either replace the drywall, subfloor, cabinets and carpeting, or live in a toxic mold den. Financially ready or not, these consumers face no choice but to remodel. That’s part of what’s driving HD stock price higher now, as we continue to rebuild and remodel after recent devastations.
Trading HD Stock Price
The graphic tells the story behind Home Depot, however simple it may sound. If you’re long, I don’t see any reason to completely abandon ship. That said, it’s hard to fault someone for taking profits if they’ve been along for a big win. HD stock is overbought in the short-term (blue circle) but once it consolidates or pulls back some, it should go back to its winning ways.
The best part? Revenue is forecast to grow about 6.6% in fiscal 2018 and 5.4% the following year. Analysts expect about 15% and 13.5% earnings growth in fiscal 2018 and 2019, respectively. I think the fiscal 2019 numbers may be too low at this rate.
In any regard, 20 times forward earnings estimates is not that lofty a valuation to pay for such high-quality growth. Additionally, Home Depot pays out a 2% dividend yield.