This morning the equity markets are falling on the headline that the yield curve has inverted but that doesn’t mean there aren’t great stocks to buy. It is nice to know that a stock like Home Depot (NYSE:HD) only has one real competitor in the U.S., which is Lowe’s (NYSE:LOW). And it’s even better to know that HD stock is 30% cheaper than LOW.
And what is even more awesome than that is that HD is also performing five times better year-to-date than LOW.
So if the overall equity thesis is still bullish, and stocks will be higher in the future than now, then the Home Depot stock is a buy. This is especially true if investors have a time frame longer than a few ticks.
There is a temporary hitch in the logic now because Home Depot’s earnings report is approaching. Such events are binary in nature. That means the short-term reaction in HD will solely depend on trader sentiment, not the facts themselves.
In other words, even if Home Depot management delivers a home run earnings report, we don’t know if the traders will accept it as positive. It is impossible to forecast the direction of the stock into its following open. That is why we do homework and decide on the viability of holding a stock like HD for at least the mid-term.
Additionally, the fundamentals and the technicals also suggest that the upside scenario in HD stock is still more likely than the disaster scenario.
For about 18 months, Home Depot stock has been fighting over a neckline around $205 per share. Last year, the September rally failed as the whole market crashed into Christmas.
But since then, HD fans rallied the stock back up to the same neckline and beat it. They have clearly established higher-lows in HD stock attacking a long-term standing neckline. More often than not, these end in a breakout more unless management errs in a big way.
Home Depot Stock Has a Big Rally Setup Looming Above
Since July, HD stock set a double top near $220 per share. But unlike most traders, I don’t consider those as omens to absolute tops. As long as HD is setting higher lows, $220 then becomes a clear target to beat. And if that happens, more momentum sellers will jump into the rally and HD stock will spike at least $10 from there.
For the last two years, the weekly Home Depot chart shows the stock is consolidating inside a wide range. This usually sets of a solid floor underneath, so in this case the bulls will have support to embark on their next upside scenario.
Moreover, Home Depot stock is not expensive as it sells at price-to-earnings ratio of 21. This is much cheaper than LOW’s and in line with most companies with similar growth. So owning the stock for the long-term, even at these levels, is not likely to be a financial disaster.
Can the price go down? Sure, but as part of normal price action. The only reason Home Depot would fail completely is a story line that doesn’t yet exist.
The Federal Reserve is committed to keeping long-term rates low. This will encourage people to spend money on their homes. It also entices businesses to build and expand. A lot of this money will end up in Home Depot stores.
Given the current geopolitical economic environment, and since all central banks are also committed to global expansion, shorting Home Depot fundamentally is wrong.
We are still in headline mode where fundamentals fall hostage to tweets and state media releases. So clearly for the short-term we do have bumps in the road. The economic battle with China stalled and is a source of angst for Wall Street.
But nothing has changed in the last year. Both countries still need to come to a truce and will eventually get to it. It is just a matter of time before investors can stop selling on knee-jerk reactions for extraneous reasons.
Meanwhile, companies like Home Depot are still delivering great reports so there are no wheels falling off the hinges here. This is not last December and definitely not 1999. I consider this to be a fundamental trade with a relaxed stop below.
Of course, I never risk more than I can afford to lose and most importantly, I don’t enter an entire position all at once. This leaves room to adjust size in order to manage the trade.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. Join his live chat room for free here.
