The stock of building supplies retailerHome Depot (
) is up 35% so far this year.
A gain like that sometimes makes investors think a stock's run
is over. The base count, though, is often a better guidepost than
A stock tends to hold a higher chance of finding success out
of a first- or second-stage base than a later one.
Home Depot's most recent base was a stage two, flat base with
a 53.38 buy point. (The flat base followed a short cup with
handle. A cup with handle should be a minimum of seven weeks. As
noted, this cup with handle was only 32 days long.)
Is it therefore too late to buy since the next base will be
stage three? Well, yes and no. Home Depot is 6% past the 53.38
buy point, which means it is too extended from the last valid buy
point to buy shares.
However, the stock completed a three-weeks-tight pattern on
Friday. This could peg a secondary buy point of 57.28. The stock
needs to clear that level in strong volume to validate the buy
Home Depot has a few tail winds working in its favor. The
stock's industry group was No. 11 of 197 groups, as of Friday's
As Home Depot's CEO Francis Blake pointed out at the earnings
call in mid-August, "Housing now is a contributor to GDP growth
rather than a drag."
Blake added, though, that he sees Home Depot's business as
more related to overall GDP growth than to the housing
The fundamentals for Home Depot are improving, but still show
weakness. While return on equity was 21% last fiscal year, pretax
margin still hasn't returned to the double-digit percentages of
2006-07. Yet after-tax margin of 7.4% in the July quarter was the
best in years.
Earnings grew 25% and 22% in the past two fiscal years ended
in January, ending four years of declining earnings and revenue.
But sales growth was only 3% and 4% in the past two years.
The Street expects earnings to advance 20% this year on a 5%
sales gain. Home Depot hasn't seen double-digit sales growth
At the end of July, the company had 2,255 stores. About 88% of
the stores are in the U.S. The rest are in Canada, Mexico and
China. The stock's annual dividend yield is 2%.