Home Depot (NYSE:HD), like so many other stocks that rely on a healthy real estate market, has had a tough go of it over the past year.
While it has still managed to score a nearly 3% gain in the past 12 months (and another nearly 3% in its dividend), it hasn’t been the wild ride that tech stocks have had. Granted, it is still off its September 2108 highs, but it has been more a controlled slide than a precipitous drop.
And ironically, the thing that looks like HD’s great hope moving forward is a slowing economy, not one that is heating up.
Looking Forward in HD Stock
As we saw last year, when there were signs that the U.S. economy was starting to roar back to life, the Federal Reserve was ready with its counter measures to hold runaway inflation at bay — interest rate hikes.
Also, selling off the massive mortgage-backed securities (MBS) portfolio it has purchased over the past decade is something that analysts say also can act like a de facto interest rate rise.
This rate rise saw mortgages go up and potential homeowners, as well as refinancing and home equity loan activity, stall. And that meant HD stock was out of luck. That’s especially true on the homebuilding side, because a lion’s share of its revenue comes from contractors rather than individual consumers.
Once the market started to absorb the implications, it started to lower its expectations of HD stock. Fortunately Home Depot wasn’t ever overbought like some of the homebuilders, so while it was painted with the same brush, it didn’t get as many coats.
But once the market adjusted to a slower economy in 2019 and the massive adjustment in the broad market took place in December, we’re back in a good space moving forward.
HD stock is up 6% year to date. The Federal Reserve has backed off on its inflation-phobic policies and is planning on giving the economy space to grow. And it’s slowing down the sale of is MBS portfolio.
All this is very good news for Home Depot stock moving forward.
What’s more, the Mortgage Bankers Association announced Wednesday that mortgage applications were up last week by 2.3%. That’s a sign lower mortgage rates are starting to have an effect in the marketplace.
It’s always a challenge to be a market leader. While you have the size and money to weather economic storms, you’re also the first company hit when the sector is challenged. You’re usually expected to grow faster in good times but suffer less in bad times. Yet your stock is usually hit first when things start headed south.
In a market as big as the housing market, these moves take a while to work themselves out. Looking at these trends on a quarterly basis doesn’t really do the whole sector justice.
For example, according to a recent study released by the Joint Center for Housing Studies of Harvard University, for just the home renovation business alone is worth $450 billion annually in the U.S.
That’s a big ship to turn.
My Portfolio Grader gives HD stock a C rating right now, but it’s cheap and reliable, so if you want to step and take its dividend on a down payment for future growth, it may well be worth it.
Louis Navellier is a renowned growth investor. He is the editor of four investing newsletters: Growth Investor, Breakthrough Stocks, Accelerated Profits and Platinum Growth. His most popular service, Growth Investor, has a track record of beating the market 3:1 over the last 14 years. He uses a combination of quantitative and fundamental analysis to identify market-beating stocks. Mr. Navellier has made his proven formula accessible to investors via his free, online stock rating tool, PortfolioGrader.com. Louis Navellier may hold some of the aforementioned securities in one or more of his newsletters.