As the novel coronavirus crisis eases during the rest of the summer ahead of a likely flare-up this fall, the outlook of Home Depot (NYSE:HD) is rather poor. Also set to influence the performance of the company and Home Depot stock in the coming months are a pull-forward of projects in recent months and a “second wave” of Covid-19.
A number of factors will likely put pressure on Home Depot’s business in the months ahead. In the near-term, as I predicted previously in a column about Lowe’s (NYSE:LOW), reduced fear of Covid-19 will likely cause many more Americans to re-engage in activities outside of their homes. As that happens, Home Depot’s sales growth is likely to slow.
Growth Is Starting to Slow
In fact, there’s evidence that this trend is already playing out. Specifically, on its second-quarter earnings conference call, held on Aug. 18, the retailer noted that its U.S. year-over-year comp sales growth came in at 27.3% in May, 27.3% in June, and 21% in July. Clearly, there was a major deceleration of the company’s growth when many states started really opening their economies.
Home Depot added that “through the first two weeks of August, comparable sales growth remains at levels similar to total company’s second quarter comp sales.” Since the retailer’s overall Q2 comp sales rose 23.4% year-over-year in Q2 and 25.7% in June, it’s clear that its sales growth remained well off its peak this month.
And in September, with many children going back to school and many adults returning to work, the routines of tens of millions households may return to normal. This reduces the amount of time available for home projects.
Finally, a large number of people worked so extensively on their houses during the pandemic that they no longer have home projects left to do.
A “Second Wave” Could Hurt Home Depot
As I’ve noted previously, I believe that there’s a good chance that the U.S. will experience a brief “second wave” of Covid-19 this fall before a vaccine is ready. As a result, some states could close or partially close their economies.
During its earnings conference call, Home Depot said that its business was hurt during the early weeks of the first wave of the pandemic. Specifically, the company blamed reduced hours, the tendency of customers to make fewer trips to its stores and the cancellation of its events and promotions.
Additionally, Home Depot noted that the spending of higher-end professional contractors was rebounding recently, as governments resume issuing permits for projects. A reinstatement of closures would halt that rebound.
Home Depot Does Have One Major Positive Catalyst
With home sales jumping amid lower interest rates and the exodus from some cities, many of those who bought homes recently will look to improve them. In order to do so, they will have to buy home-improvement products.
As a result, Home Depot should get a boost from the home-buying surge.
That trend, however, could also ease during a “second wave” of Covid-19.
The Bottom Line on Home Depot Stock
The shares are down slightly since the retailer reported its Q2 results. I think the Street realizes that Home Depot’s glory days are in the rearview mirror. As a result, the shares are probably destined to continue to retreat in the short term.
However, I believe that investors are underestimating the negative catalysts that the company is facing in the medium term. As these trends become more apparent, the stock is likely to pull back further.
Consequently, I recommend that investors sell their Home Depot stock at this point.
Larry Ramer has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been GE, solar stocks, and Snap. You can reach him on StockTwits at @larryramer. As of this writing, Larry Ramer did not own shares of any of the aforementioned securities.
