Home Depot (NYSE:HD) is much like its publicly traded equity: both don’t draw much attention until you need them. Put another way, Home Depot stock is usually a safe, reliable investment, but it is a tad on the boring side.
However, shares have been doing something recently that they don’t usually: being interesting. While the benchmark indices like the Dow Jones have been struggling to gain traction in August, the HD stock price has put on a remarkable run. Since the first of the month, shares gained nearly 7%.
But at the same time, Home Depot stock is at record levels. Typically, even the strongest and most stable names experience volatility in a market-wide downturn. Therefore, it seems unreasonable to jump aboard HD, especially when headwinds like the U.S.-China trade war and rising economic fears have gripped investors.
Of course, I can understand the concerns here. But if you want exposure to recession-resistant companies, HD stock is among your best bets. Here are three reasons why:
1. Home Depot Stock Is Insulated from Amazon
In retrospect, the late 1990s to early 2000s was the peak of American shopping malls’ cultural influence. Since then, brick-and-mortar retailers had to contend with the threat of e-commerce. And when I – or anyone – refers to e-commerce, we’re talking about Amazon (NASDAQ:AMZN).
You only need to look at the technical charts for traditional retailers like Macy’s (NYSE:M) or Nordstrom (NYSE:JWN) to recognize the damage rendered by Amazon. Although these two names are renowned brands across high-end shopping centers, they can’t escape the ecommerce onslaught. But Home Depot stock? Fortunately for stakeholders, they won’t have to worry about digital disruption.
The biggest reason why is that most people who shop at Home Depot do so for renovations or repairs. Neither is an exact science, which essentially insulates the HD stock price from Amazon’s encroachment.
From my experience with repair work done on my home, the process is a hit-or-miss affair: pipes don’t quite work right, or components somehow are either too big or too small. And don’t get me started on repainting the interior. I had no clue how many different shades of white existed.
I say all this to illustrate a point: Home Depot’s business necessitates a physical presence. In fact, going digital would be a nuisance to its millions of customers. Therefore, I’m confident that the HD stock price can hold up better than most retail names.
2. HD Stock Benefits from Secular Demand
During bull markets, cyclical investments like tech stocks get all the love. And that’s really not a surprise. When the money is flowing, people feel comfortable tacking on greater risk. If their investments fail, hey, the money is still coming in from other sources.
But in recessionary markets, Home Depot stock and its rivals like Lowe’s Companies (NYSE:LOW) fare better than their high-growth counterparts. It’s much easier to predict the company’s revenue streams but there’s not as much guesswork involved. Aside from obvious technological improvements, construction materials are construction materials.
Moreover, HD stock benefits from consistent, secular demand. Yes, a recession will hurt Home Depot like it would any other company. However, consumers don’t really have a choice if they the home-improvement giant’s services.
Again, I speak from personal experience, but I suspect your experiences aren’t dissimilar: your plumbing doesn’t decide to conk out based on when it’s most convenient to your schedule.
Plus, I actually see some potential tailwinds for Home Depot stock if we suffer a recession. For instance, home sales have been plummeting even prior to the trade war escalation. Also, the average price of homes sold has started to flatline. Understandably, people are hesitant toward exposing themselves to unnecessary financial risk.
But homeowners might take advantage of this lull and focus instead on renovating their properties. Then, when housing comes back, they could reap greater returns. Invariably, such circumstances will only help bolster HD stock.
3. Mitigating China Risks
Turn on the news and chances are, you’ll hear various analyses about the longer-term impact of the U.S.-China trade war. And while Home Depot stock does have a secular, insular business, it too suffers from supply chain cost increases.
According to Home Depot CEO Craig Menear, the tariffs on Chinese goods will have a “cost impact” on U.S. revenue. This amounts to 2%, or $2 billion.
However, the company’s suppliers have thought ahead, shifting some manufacturing outside China. These location shifts are toward friendlier nations, including Taiwan, Vietnam, Thailand, even back home stateside.
Of course, retailers broadly have pushed these cost increases to their customers and that worries economists. But for Home Depot stock, burdening the consumer base isn’t as atrocious as it is for a discretionary-spending retailer.
I go back to the point about secular demand. If your home needs repair, you’re going to pay the increased material costs because you have to. While it’s a cynical situation, it really does favor HD stock.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.