Don't Let Housing Trend Dictate Stance On Home Depot
Although some in the media tossHome Depot ( HD ) into the same bag as housing stocks, the retail-sector stock isn't a perfect fit there.
The last major peak in housing stocks (July 2005) didn't coincide with the Retail/Wholesale-Building Products' peak (March 2006). Recently, the homebuilder stocks suffered a five-month skid, while Home Depot and its industry group advanced -- as did the major stock indexes.
For investors, this means your focus should be on the price and volume action of the stock market and of Home Depot itself (and its fundamentals).
Home Depot's earnings picture is strong. Quarterly EPS advanced 23%, 34%, 28% and most recently 23%. Revenue grew 5%, 14%, 7% and 9%. The 7% sales growth in fiscal Q1 ended in April is somewhat misleading. The year-ago quarter had an extra week. Adjusted for that, sales growth would've been 9%.
The Street expects fiscal 2014 ending in January to deliver 20% earnings growth on a 5% revenue pop. In fiscal 2015, earnings are expected to grow 18% on 4.6% revenue growth. Recent revisions have been upward.
Ideally, an investor would like to see stronger revenue growth. The company last delivered a double-digit percentage in annual revenue growth in fiscal 2006.
After-tax margin has risen on a year-ago basis for at least 15 consecutive quarters.
The quarterly dividend is 39 cents a share, a more than 50% increase over the past two years. The annualized payout is 2.1% vs. 2.49% for the S&P 500.
The chart should give investors some pause. The stock is working on a double-bottom base, according to MarketSmith's pattern-recognition technology . The potential entry is 81.33 unless the stock adds a handle, which could be near.
A significant drawback is that Home Depot's pattern is fourth stage.
Although funds lightened their overall stake by 3% in Q2, Fidelity Contrafund increased its position 38%.