In recent days and weeks, Home Depot (NYSE:HD) stock is significantly underperforming the overall consumer staples sector. Yet the housing market, which historically has been a good indicator of Home Depot’s financial results, is still going very strong. In fact, this strength is expected to continue for quite some time. Consequently, I see HD stock as a good buy for medium-term, conservative investors who are looking for a way to play the ongoing housing boom.
Since March 14, the Vanguard Consumer Staples Fund (NYSEARCA:VDC) — an exchange-traded fund (ETF) that follows the consumer staples space — has gained about 7.5%. During the same period, Home Depot’s shares have dropped approximately 7%. So without a doubt, Home Depot is greatly underperforming the consumer staples space.
Yet, as I noted earlier, the housing market still seems to be firing on all cylinders. Two Forbes columnists recently wrote that “[t]he housing market appears to be operating without brakes as home prices continue to climb–the median listing price shot up in March to a record-high of $405,000, mortgage rates continue to tick up, and buyers are not backing down. ” The columnists added that, “[m]ost housing experts are predicting the market to remain strong for a while for several reasons.”
Among these factors are strong demand for housing from young adults, an insufficient supply of housing, and tighter “lending standards.” Similarly, in late February, the CEO of Home Depot’s competitor, Lowe’s (NYSE:LOW), cited several factors that are favorable for the housing sector and home-improvement retailers. Among these were home price gains, “undersupply … an aging housing stock” and the “work-from-home trend,” Seeking Alpha reported.
Given these dynamics, the demand for housing looks to maintain strength for at least the next few months. Even as interest rates rise, I expect HD stock to rebound significantly during that period. However, despite their recent decline, the shares are trading at a forward price-to-earnings ratio of 19x, which is not cheap for a retailer.
Therefore, I don’t recommend holding the shares for the long term, as they could easily drop sharply if the housing market begins to deteriorate in the face of rising rates. So I think investors should look to take profits on HD stock within several months.
On the date of publication, Larry Ramer did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.