The Case Against Home Depot, Even After The Stock's Big Pullback
Vincent Martin | May 24, 2022 13:32
During the final three years of the 1990s, Home Depot (NYSE:HD) shares gained over 500%. A strong economy and a booming stock market led consumers to spend heavily on their homes.
Between fiscal 1996 (Home Depot fiscal years end January of the following calendar year) and fiscal 1999, revenue nearly doubled. Earnings per share rose 133%.
Between the end of 2018 and the end of 2021, shares of the Atlanta, Georgia-based retailer rallied 142%. Growth in the now far more mature business obviously was much slower than it was two decades earlier but, in context, still impressive.
Again backed by a booming stock market—though, owing to the novel coronavirus pandemic, admittedly a more inconsistent economy—between FY2018 and FY2021 Home Depot increased sales by 40%. EPS gained 60%, and the figure in FY2021 was more than double that from four years earlier.
Obviously, Home Depot now is a very different company from what it was then. But even with sales roughly four times as high as they were in FY1999, HD stock remains a cyclical play. That's been a problem before—and even after a big pullback, it could be a problem again.
The History Lesson/h2
As noted, the home improvement retailer closed the 1990s on a high note. But the housing market has peaked. Inflation adds another threat.
Investors, so far this year, have reacted quickly to those rising risks. But the current valuation doesn't suggest they've reacted quickly enough. While HD stock at 30% below its peak might seem like a steal, investors could have made and did make the same argument in 2000 and in 2007. In both cases, they were far too early. History may well repeat.
The Bull Case for Home Depot Stock/h2
Admittedly, it's possible this commentary is simply too bearish. It's worth repeating: Home Depot is a wonderful business. The housing cycle will have its effects here and there, but nonetheless, over time, the stock rallies. Even investors who bought at the end of 1999 eventually did quite well: including dividends, HD stock has returned over 9% annually since then.
The housing market may hold up. Demographic shifts to out of urban areas into lower-priced markets may create more homeowner cash to invest in renovations—and more square footage in which to invest that cash. Recession risks could be overblown.
Over the long haul, yes, HD stock still looks like it could be a winner. But that doesn't mean there's any need to rush, or that the 30% decline makes the stock 'cheap'. There remain an awful lot of risks here, and it does not appear that all of those risks are priced in.
Disclaimer: As of this writing, Vince Martin has no positions in any securities mentioned.
***
Looking to get up to speed on your next idea? With InvestingPro+, you can find:
- Any company’s financials for the last 10 years
- Financial health scores for profitability, growth, and more
- A fair value calculated from dozens of financial models
- Quick comparison to the company’s peers
- Fundamental and performance charts
And a lot more. Get all the key data fast, so you can make an informed decision with InvestingPro+. Learn More »
Get The App
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.