Source: PaxForex Premium Analytics Portal, Fundamental Insight
Investors have been shunning certain retail stocks lately. The fear is that rising inflation could hit consumers' wallets, resulting in lower sales of basic necessities. This trend has taken a toll on Home Depot stock.
The company has not been able to withstand this year's bear market. HD stock has dropped more than the S&P 500 index. They are down 30% compared to a 21% drop for the S&P 500. Can stocks of the world's largest home improvement retailer be bought at these levels?
First, let's remember a bit of detail about Home Depot. The business has two kinds of clients: DIY enthusiasts, like us when we want to color the walls in the bedroom, for instance, and professionals who make money by painting these walls. This retailer has a solid record of revenue and profit growth.
In addition, Home Depot has established itself as a good long-term investment. Over the past five years, its stock is up about 75%.
Now let's refer to nowadays. Home Depot keeps posting optimistic earnings news. By the way, Home Depot reported its highest quarterly sales and earnings ever in the second quarter. The company's sales rose 6.5 percent to $43.8 billion, and net income rose to $5.2 billion.
Despite today's economic woes, demand for home goods remains strong. At the same time, Home Depot has taken steps to contain the impact of adverse factors such as supply problems. The company has increased its inventory and invested in new supply chain facilities.
All of this suggests that Home Depot is doing well right now. But inflation and general economic headwinds are not over yet. Several signs suggest the influence on Home Depot may be limited.
And it starts with professional customers. They are key when it comes to predicting future demand. That's because they have a portfolio of orders for upcoming projects. And so far, the volume of orders for projects is large. That means the potential for more sales in the coming months - to service those projects as they come to fruition.
Home Depot has made efforts to better serve these professional customers as well. On its B2B site, the company has improved the buying and bidding process for professionals. The goal was to simplify the ordering process.
It's harder to predict what might happen in the do-it-yourself market. But one positive is the fact that people are spending more time at home than in the past. This is because, at this stage of the pandemic, many companies continue to work at least partially at home. And spending more time at home often encourages people to start home improvement projects-even small ones.
Home Depot's digital improvements should also keep clients coming back. Most people like the convenience of online shopping. So far, this is evident in Home Depot's digital sales results last quarter. The company said sales on its digital platforms were up 12% YoY. And the mobile app got record downloads, traffic, and sales.
All of this shows that Home Depot continues to increase revenues and is doing well in the face of adversity. Perhaps the economic downturn may eventually affect revenues, but so far there are no clear signs of a slowdown. Moreover, as mentioned above, demand in the professional market remains healthy.
As for Home Depot's valuation? The company's stock trades at 17 times its 12-month earnings ratio. Over the past five years, they have traded above 25 times earnings most of the time. Given recent earnings and future prospects, the stock looks like a bargain at today's level.
The rise in Home Depot stock may not happen immediately. Most investors may continue to avoid consumer spending companies. But that doesn't change Home Depot's bright earnings picture. And those earnings should eventually lead to long-term growth in the stock in the future. So now is a great time for long-term investors to get involved in the Home Depot story.
As long as price is above 275.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 284.17
- Take Profit 1: 293.00
- Take Profit 2: 303.00
Alternative scenario:
If the 275.00 level is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 275.00
- Take Profit 1: 265.00
- Take Profit 2: 260.00
