With a housing recovery well underway, many are looking for
equity plays on this important trend. While homebuilders were
once a popular destination, investors have branched out into the
construction product and retail segments for tangential exposure
to this positive situation.
That is because, with housing prices back on track in some
markets, some homeowners are finally looking at trading up or
moving out of their current residences. This creates a huge
demand for new home furnishings, appliances, and general
construction materials in order to make sure that everything is
in top shape for potential buyers.
While there are a number of companies that fit this bill,
arguably one of the biggest is
Home Depot (
. The retail giant is home to many of the aforementioned listed
products, and thus could be a big beneficiary of the trend.
However, some are starting to worry about housing once more,
thanks to a recent flurry of so-so data. It also hasn't helped
that the stock market has been weak these last few days,
suggesting to some that a focus on more defensive plays could be
the way to go in the near term.
But what do you think about Home Depot?
Does this massive retailer have room to run thanks to a
stronger housing market, or will a spring swoon push this company
into bear territory?
Reasons to Buy:
- Although HD only has a Rank of 3, it is in solid company
from an Industry Rank perspective. At time of writing, it was
in the top 25% for this metric.
- The company also has a positive ESP, suggesting that
estimates have been moving higher for this quarter and that a
beat might be in the cards.
- HD also has a good history of beats when it comes to
earnings season. It has met or beat estimates in every one of
the last four quarters, and it hasn't missed overall in more
than five years.
Reasons to Sell:
- Is the housing market really that strong? Data such as the
recent housing market index
suggest that it might not be, which may not be good news for
companies like HD.
- HD is a bit pricey on a P/E basis, as this important ratio
is over 20. Obviously, this isn't that extreme, but this
represents a P/E greater than what investors saw in the height
of the housing bubble years of 2005-2007.
- Other metrics, such as P/B, P/S, and P/CF are all above
multi-year averages for the company as well. Add this in to
recent weakness in consumer sentiment and jobless claims, and
it is certainly possible that many are just too confident over
HD's prospects in the near term.
Which story wins out for you; the strong history of HD
repeating itself in the months ahead, or a lackluster economic
environment pushing this potentially overvalued retailer back to
Let us know in the comments section below!
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