Ensemble Capital, an independently-owned investment firm, recently published its first-quarter Ensemble Fund commentary – a copy of which can be downloaded here. During the first quarter of 2020, the Ensemble Fund returned -18.6%, while the benchmark S&P 500 was down 19.6%.
In the said letter, Ensemble Capital highlighted a few stocks and Home Depot Inc. (NYSE:HD) is one of them. Home Depot is the largest home improvement retailer in the United States. Year-to-date, HD stock gained 3.8% and on May 4th it had a closing price of $221.84. Its market cap is of $243.4 billion. Here is what Ensemble Capital said:
“Home Depot, Inc. (3.7% weight in portfolio): Home Depot is a newer addition to the Fund. However, we’ve followed the home improvement space for many years and we’re particularly excited about the opportunity ahead for Home Depot. In the years since the housing bust, the company has managed to increase revenue by 60% and earnings by 240% even while only increasing their store count by just 2%. This sort of disciplined execution has led to the company exhibiting returns on invested capital far above most other established retailers, although Starbucks, another holding of ours also generates very high returns on capital.
As discussed during our notes on First American (above), we do expect housing activity to come to a standstill in the near term. However, Home Depot is deemed an essential business and their stores remain open. With ultra-low interest rates enabling cash out refinancing and with a homeowner’s deck that needed repairs prior to the Coronavirus still needing to be repaired after this is over, we expect an explosion of pent up demand to come back to the home improvement sector when the crisis has passed. Just as housing transactions were growing rapidly in January and February, most leading indicators of home improvement activity were also accelerating going into this period.
As anyone who owns a house knows, it is often easy to overlook cosmetic issues in a house you’ve lived in a long time or defer maintenance on small items. But after being stuck in their homes for a month or two, it would not surprise us at all if many homeowners emerge with a long list of items they want to fix. And while Home Depot is the leader in their category and we feel confident they can get through this crisis, the same cannot be said of the large number of local hardware stores which collectively still have a meaningful portion of home improvement market share.”
In Q4 2019, the number of bullish hedge fund positions on HD stock increased by about 30% from the previous quarter (see the chart here).
Disclosure: None. This article is originally published at Insider Monkey.
