Log in

Why Home Depot Remains a Good Investment

Posted on Thursday, December 12th, 2019 by Chris Markoch

Why Home Depot Remains a Good Investment

Home Depot (NYSE:HD) shares are holding steady one day after the company issued a forecast for lower sales volume in 2020. The Atlanta-based home improvement chain is not forecasting total sales to rise by 3.5% in 2020. In the all-important comparable-store sales, Home Depot is forecasting an increase of 4%. This is shy of analysts’ expectations for comparable-store sales growth of 4.3%. It is sharply down from the estimate of between 4.5% to 6% growth the company was providing investors just two years ago.

By itself, this news could not have been that surprising to investors. It’s not hard to see that there has been a general cooling in the economy. However, this announcement came on the heels of the company reporting lower forecast in full-year sales for 2019 in its third-quarter earnings report.

Housing is a Double-Edged Sword for Home Depot

As reported in The Wall Street Journal, the real-estate brokerage Redfin cites that homeowners are now staying in their homes on average five years longer than they were in 2010. When homeowners decide to stick with what they have, they don’t mean having the home stay the way it is. That means remodeling, which is a positive sign for Home Depot.

At its Investor Day event, Home Depot executives said that U.S. consumer spending still appears healthy, unemployment is low, and wages are rising. They also cited that overall home equity is rising which, combined with homeowners staying in their homes, means there is more money and willingness to spend on home improvements.

At its “Investor Day” event, Home Depot’s finance chief Richard McPhail remained upbeat about the housing market. “While we don’t expect to see the same tailwinds in prior years, we do expect to see a positive influence from housing,” said McPhail. Home Depot is estimating a 1.8% rise in GDP in 2020.

Where is HD stock at right now?

When I look at Home Depot’s stock chart over the last year, I can’t help but notice the pattern of higher highs and higher lows that signal an uptrend. With that being said, I won’t ignore the fact that the stock does appear to be at a crucial point. Although still above its 200-day moving average, the nearly 10% reversal that the stock suffered in late November may signal the end of that trend.

If you’re looking to trade Home Depot stock, there’s a lot to digest. As of this writing, HD stock was trading at around $213 per share. That gives it about 2% of wiggle room before it would breach the 200-day moving average.

On the positive side, after a sharp sell-off on December 11, the stock appears to be stabilizing. Plus, the Relative Strength Index for the stock is moving into oversold territory.

Traders looking for negative news can cite the moving average convergence/divergence (MACD) indicator that is more negative than it has been in the last six months. Typically this would support a larger sell-off.

Home Depot is Embracing “the New Retail”

Last month, I expressed the opinion that Home Depot was being irrationally punished by investors. I also suggested that some of the sell-off was due to profit-taking more than a fundamental distaste for the stock. Prior to this latest news, HD stock was up 5% from its low and looked like it was on its way to recovering that loss.

One of the reasons for my optimism is Home Depot’s investment in revamping its supply chain. The company is embracing the anytime, anywhere, anyway mantra that has fueled Amazon’s (NASDAQ:AMZN) growth. The Amazon model is being adopted by companies such as Target (NYSE:TGT) and Walmart (NYSE:WMT), but Home Depot is the first example of a company that is not a direct competitor of Amazon going with the omnichannel model.

Maybe that’s for the best. It’s been speculated that Amazon CEO Jeff Bezos is looking to crack the code for the home improvement sector.

That’s why Home Depot’s strategy presents both a risk and reward. On the one hand, it’s a $1.2 billion investment that could fundamentally the way consumers shop for and think about, home improvement. On the other hand, if the investment fails to show a hefty return on investment, what will the company have to show for it?

The bottom line on Home Depot

Home improvement will always follow the housing market, and the health of that overall market is unclear. Analysts currently have a consensus hold rating on the stock. However, the average price target of around $237 a share would be a nearly 12.5% increase from current levels. And, HD has a forward PE ratio that is comparable to Lowe’s (NYSE:LOW) its biggest competitor in the space.

Home Depot is exhibiting forward-thinking in an attempt to modernize for the changing consumer. I have to believe that no matter how that bet pays off in terms of sales, it will be a more nimble company going forward. And that plays well in any economy.

Enter your email address below to receive a concise daily summary of analysts' upgrades, downgrades and new coverage with MarketBeat.com's FREE daily email newsletter.

Yahoo Gemini Pixel