It’s hard not to buy stocks when they pullback following strong quarterly results. That’s exactly the case we have here with Home Depot (NYSE:HD). Fortunately for us, Home Depot stock also fits the “common sense” investment thesis.
What’s the common sense investment thesis? Simply put, go to a Home Depot this weekend. The stores are crowded beyond belief as homeowners look to do-it-yourself landscaping and renovation products.
Contractors are in the stores constantly as they grab supplies for their next job. Speaking of contractors, have you tried to get a quality one over to your house?
In many parts of the country, even that can take a long time. That’s because consumers are pouring money into renovating their homes. In some cases, they are looking to sell and are making last-minute upgrades.
Some recently bought their homes knowing they need a little TLC, while some homeowners are finally in a good enough place to get that new kitchen or bathroom they’ve been dreaming about for a decade or more.
The reasons why are limitless, but they don’t really matter. The simple fact of the matter is that customers are stuffing Home Depot and its shareholders couldn’t be happier.
Except that the stock hasn’t been reflecting that traffic. So what should we do with HD stock?
Valuing Home Depot Stock
Let’s get right down to business: Analysts expect Home Depot to grow earnings 26.5% in 2018 and 7.5% in 2019. On the sales front, estimates call for 7% and 4% growth this year and next year, respectively. Management expects full-year comparable-store sales to grow 5%.
The thing I really, really like about Home Depot though? It’s growing through improved online sales and better margins. Of course a lower tax rate rate helps, as does its stock buyback to some regard.
But the fact that Home Depot is growing sales and earnings this much without opening hardly any new stores (just 4 in the last quarter) is really impressive to me. It shows that management has a great grasp of what’s working in retail and what’s not.
Further, new research shows that unlike most retailers, Amazon (NASDAQ:AMZN) isn’t infringing on Home Depot. Unlike say Macy’s (NYSE:M), Kohl’s (NYSE:KSS), Target (NYSE:TGT) or even Kroger (NYSE:KR), Home Depot and Lowe’s (NYSE:LOW) don’t have to worry about the online juggernaut too much.
When people need tools or products, they don’t want to wait two days for Amazon to deliver them. Especially if they need to go back to the store two or three times (or four or five, if you’re me).
But just in case, Home Depot is seriously upping its online game. Even though it already boasts a pretty impressive tech team, management said last quarter it would dump another $1.2 billion into its online investments over the next five years. Wolfe Research analysts estimate that Home Depot can reach 95% of the U.S. population in two days and 30% in one day.
Trading Home Depot Stock
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So if Home Depot is innovating online, has expanding margins and impressive growth, what’s holding back Home Depot stock?
One explanation could be comp-store sales, which grew just 4.2% last quarter despite the typical strength we see in the company’s fiscal first-quarter results.
While that’s still pretty good, it came in softer than many previous quarters. For reference, the prior quarter was nearly twice as high, at 7.9%. Around 15% to 20% of first quarter sales comes from the garden section, according to executive vice president Ted Decker.
That segment had negative comps in the quarter, thanks to uncommonly cold weather and several snow storms in mid-April.
While retailers could probably blame weather every quarter, I feel this was a unique situation, as the weather really was abnormal and otherwise, Home Depot is operating just fine. It helps that economy continues to do well too.
So what do the charts say? $190 was former resistance. After pushing through this mark in early June, it should now act as support. Further, the 50-day moving average is also at $190, while the 100-day is at $185 and the 200-day is solidly trending higher.
Should $190 hold as support, investors can buy it and look for Home Depot stock to run to $200.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.
