Home Depot (NYSE:HD) stock has been unfairly punished, if you ask me. The retailer continues to beat expectations and is churning out some of the best growth in the industry. Despite that, though, HD stock has been pummeled during the recent selloff — Lowe’s (NYSE:LOW) too. What gives?
There are likely two factors at play. The first is market mechanics. Simply put, even good stocks get thrown out with the bad when the market is under immense pressure.
Make no mistake about it, bulls had a brutal stretch of trading in October, with many major indices falling by double-digit percentages.
One of the catalysts to that selloff was a rate hike in September, with the Federal Reserve’s reiteration that it would likely hike again in December. The Fed appears to be on autopilot, and that scares investors because — at least on the surface — it seems like the Fed isn’t making decisions based on the economic landscape, but simply opting to hike at set intervals.
That impacts Home Depot because as rates increase it hurts home affordability. That saps demand out of the real estate market and investors perceive that as a weight on Home Depot’s business, as it should — in theory — hurt business. But will it?
As CFO Carol Tomé said on the company’s most recent conference call:
“You need to think about it on the margin, because if only 4% of housing units are turning in a year, that means 96% of homeowners are staying in their home and they don’t care about rising interest rates, and in fact they love rising home prices because their equity is worth more. So really, when you think about affordability, it’s the 96% of the housing units that are in place that are driving the home improvement spend and not so much the marginal turnover that the media tends to pay attention to.”
Valuing Home Depot Stock Into Earnings
Last quarter easily topped earnings and revenue estimates, growing the latter by more than 8% year-over-year (YoY). The most impressive part of Home Depot’s growth is that the company relies on essentially no store growth. Meaning that HD barely opens any new stores, so all of the earnings and revenue growth comes from improving its current business.
The upcoming third quarter results will be reported before the open on Tuesday Nov. 13. Analysts are looking for earnings of $2.26 per share on revenue of $26.26 billion. If HD reports in-line results, that will represent growth of 22.8% and 4.9%, respectively.
For the full year, analysts expect earnings growth of 28% and sales growth of 7.3%. However, one issue for investors might be that growth is forecast to slow to just 7.3% and 3.7% in 2019, respectively.
All that said, we’re not in a recession, wage growth is finally ticking higher and unemployment is low. That bodes well for home improvement projects big and small and HD stock should ride the coattails of another strong holiday season. Trading at 19 times this year’s earnings doesn’t seem exuberant for a company with solid growth and a 2.3% yield.
Trading HD stock Ahead of Earnings
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From a fundamental perspective, it’s hard to dislike Home Depot. From a chart perspective though, it’s not that rosy. That could be said for many stocks right now, given the beating most took in October.
The $190 level is notable and roughly lines up with the 200-day moving average. The $197.50 mark is significant thanks to that long-term downtrend resistance mark (purple line). It’s also where the 50-day and 100-day moving averages currently rest.
Because of these levels, HD stock could struggle with the $190 and $197 levels. Home Depot earnings could be the make or break in this situation then, as it could either propel HD over these marks or solidify them as current resistance. Should it fall, look for support in the low-$170s.
Keep in mind we could get a situation where HD stock jumps over $190, but can’t break through $197. If that’s the case, look for $190 and the 200-day to become support, while Home Depot stock tries to chip its way through $197.
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.
