Is The Home Depot, Inc. (HD) A Smart Way to Play a Housing Recovery?

Page 1 of 2

The Home Depot, Inc. (NYSE:HD) has been a popular pick among many investors looking for a large-cap stock with exposure to the boom in construction and housing sales (as sellers, house flippers, or buyers touch up housing properties before or after a transaction). In the last year The Home Depot, Inc. (NYSE:HD)’s stock is up close to 60%, more than doubling the return of the S&P 500. However, this increase in the price has been more anticipatory of future growth than it has been reflecting excellent results from the company; as a result, the stock’s trailing earnings multiple has increased to 25.

The first quarter of The Home Depot, Inc. (NYSE:HD)’s fiscal year ended in early May, with the company recording 7% revenue growth versus a year earlier. According to the 10-Q, this was primarily caused by same store sales growth of 4% (almost entirely due to larger customer spending per transaction). Net margins expanded with the result being that net income was up by 18%. While that’s a high earnings growth rate, we’d be concerned that it’s mostly come from higher net margins which is likely not a sustainable source of future increases in profits, and the valuation is high enough that The Home Depot, Inc. (NYSE:HD) would have to turn in similar growth rates for some time. Instead, it looks like current investors are dependent on sales numbers accelerating in future quarters, though they could be helped by the fact that cash flow from operations has been well above capex and management has been using this excess cash flow to buy back shares.

The Home Depot, Inc. (NYSE:HD)We can track interest in The Home Depot, Inc. (NYSE:HD) among hedge funds and other notable investors by consulting the same database of quarterly 13F filings which we use to help us develop investment strategies (for example, we have found that the most popular small cap stocks among hedge funds earn an average excess return of 18 percentage points per year). According to these filings, billionaire Ken Fisher’s Fisher Asset Management owned 8.1 million shares of The Home Depot, Inc. (NYSE:HD) as of the end of March (find Fisher’s favorite stocks). Renaissance Technologies, founded by billionaire Jim Simons, increased its stake during Q1 to a total of 4.3 million shares (see Renaissance’s stock picks).

The closest peer for Home Depot is Lowe’s Companies, Inc. (NYSE:LOW). Markets are similarly optimistic about this home improvement store, as Lowe’s carries trailing and forward earnings multiples of 25 and 18 respectively (Home Depot’s forward P/E is 19). Lowe’s actually seems to have been doing fairly poorly recently, in comparison to Home Depot: there was little change in either revenue or earnings in its most recent quarter compared to the same period in the previous fiscal year. Its performance should probably converge to that of its larger peer, but we’d avoid it for now and take this as a sign of caution on the industry as a whole.

Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

10 Most Influential Papers In Economics

Top 8 Biggest Charities in the US

10 Worst Celebrity Career Moves Ever

Top 10 Best Paid Tennis Stars in the World

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

6 Ways to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

10 Best Places to Visit in Central and South America

The 10 Greatest Empires in History Which Nearly Conquered the World

The 6 Cheapest Boarding Schools In America 2015

5 Clear Reasons LoL is Better than DotA, Continues to Rule MOBAs

The Only 9 Teams with a Chance to Win the Super Bowl

The 15 Most Common Phobias in America that Induce Fits of Panic

Top 6 Least Expensive Tourist Destinations in 2014

Jim Goetz, Peter Fenton, Jim Breyer: Top 6 Venture Investors for 2014

Top 15 Billionaires in 2014

5 Pitfalls To Avoid When Buying a Franchise

Top 20 Medical Schools in the US – 2014 Rankings

4 Business Strategies that Turned Jamie Oliver into the World’s Richest Chef

6 Qualities That Make You A Good Team Player

10 High Paying Seasonal Jobs in America this Holiday Season

The 10 Busiest Shipping Lanes in the World

5 Most Valuable Brands in China

The 10 States with Highest Substance Abuse Rates Crippling Their Populace

The Top 10 Things to Do Before You Die That Will Echo for Eternity

The 10 Best Selling Items on Etsy

Top 10 Things to Do in Tokyo, the Greatest City in the World

10 Mistakes on Social Media that Can Harm You and Will Probably Get You Canned

The 10 Best Cities to Find Jobs in 2014

The 10 Most Controversial Songs Of All Time to Hit (and get Banned from) the Airwaves

The 20 Biggest IPOs in US History

The 10 Best Places to Visit in Mexico that Are Beautiful and Safe

7 Bad Habits that Age You Beyond Your Years

The 40 Best Fortune Cookie Sayings That Will Leave You Bemused, Befuddled, or Beguiled

10 Foods to Eat Before a Workout to Make Every Drop of Sweat Count

The 5 Best Documentaries On Netflix You Must See

The Most Heartwarming and Inspirational Story Of This Halloween Season, It Will Make You Cry and Jump For Joy

10 Best Party Songs of All Time to Bring the House Down With

5 New World Order Conspiracy Theories that Will Strangle the World

The 10 Highest Rated Movies of 2014

The 10 Largest Container Shipping Companies in the World

The 10 Largest Armies in the World: Who Should We Be Afraid Of?

Best Warren Buffett Quotes on Money You Need to Hear

The 10 Highest Suicide Rates by Profession

The 20 Most Underrated Movies of All Time

The 10 Fastest Growing Companies in America

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!