Investors in Home Depot Inc (NYSE:HD) did as well as those of Alphabet Inc (NASDAQ:GOOGL), the parent of Google, in 2017. Overall it wasn’t a bad year to own HD stock. Both stocks are finishing the year with gains of about 38%.
If its Christmas is as good as analysts think it will be, when it reports Feb. 13, Home Depot will have revenues of $100 billion, against $104 billion for Alphabet. Not bad for a retailer or for HD stock for that matter.
Moreover, if you are looking for bargains, which are few in today’s market, the stock still sells at a price to earnings ratio of just over 25, against 36 for Alphabet. Even its five-year record of growth, with the stock up 197%, compares well with Google’s 209% gain in that time.
How could anyone possibly dislike Home Depot?
The Bear Case for HD Stock
According to Vince Martin, the stock is finally too expensive. Home improvement is cyclical, and rising interest rates should make homes less affordable, he wrote recently.
Dividing its current price by its expected 2018 earnings to get its forward earnings multiple puts that at 22, against just 17 for rival Lowes’ Companies Inc. (NYSE:LOW). A lot needs to go right for Home Depot to replicate the year now ending.
Lawrence Meyers agrees. Unless you’re a long-term investor who can wait out a recession, now is just not the time to be buying Home Depot, he writes.
Meyers likes to see a price earnings to growth, or PEG ratio of 1.0, and Home Depot is close to 2. That makes it a stretch at its Dec. 19 opening price of almost $185 per share, and even with a dividend of 89 cents per share, almost double its fix in just 2014, your yield will be less than 2%.
The Bull Case for HD Stock
I owned HD stock in the past. I got out because of fears the new Administration would crash the economic ambulance. That has not happened, yet. But the likelihood of that happening grows every year. I don’t think adding more to capital while cutting demand is going to create the growth speculative fever demands to keep prices where they are.
That said, I regret selling. Home Depot has best in class earnings growth. Portfolio Grader recently raised it from a buy to a strong buy. Luke Lango likes the tax reform package and sees Home Depot as a great way to profit from it.
If you bought 100 shares of Home Depot when it went public, around the time I moved to Atlanta in 1981, you would have over 4,271 shares and a steady stream of dividends that now add up to more each year than your initial investment.
The gain in the stock price, 530,733%, explains why co-founder Arthur Blank now owns the Atlanta Falcons while the rest of us just watch them.
Home Depot has become the kind of stock workers there could put in their kids’ college funds and pay for college, the kind that would have them enjoying retirements as seen on TV. Not bad for a hardware store.
The Bottom Line
Even the writers who are bearish on Home Depot consider it a great stock for the long term. An investor in their 20s, like my own kids, can buy shares today confident that they have a fairly Amazon.Com Inc. (NASDAQ:AMZN) proof holding whose value will be there when they need it.
I have no idea if Blanks’ Falcons will win the Super Bowl, but they’re a fun team to watch. Almost as much fun as watching HD stock.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN.
