Source: PaxForex Premium Analytics Portal, Fundamental Insight
Are you contemplating an investment in Home Depot stock? Current potential buyers face a bit of a dilemma. While shares are still below their pandemic-era peak from late 2021, they have surged 30% since October's low. However, with a forward-looking price-to-earnings (P/E) ratio of 24, the stock is trading at a premium compared to its historical average.
Is it too late to invest in Home Depot?
For those with a long-term perspective, the answer is likely no. The company is sending mixed signals. Last quarter’s performance surpassed expectations with both revenue and earnings exceeding forecasts. Despite this, sales growth was modest, and same-store sales declined by 3.3% year-over-year. Although per-share earnings reached $4.67 - beating the $4.53 estimate - it marked the sixth consecutive decline.
Furthermore, Home Depot has lowered its full-year earnings forecast, now anticipating a drop of 1% to 3% from the previous year, with same-store sales projected to fall between 3% and 4% in 2024. CEO Ted Decker attributes this weakness to higher interest rates and macroeconomic uncertainties, which have dampened consumer spending on home improvement projects.
Despite the slight easing of interest rates, macroeconomic uncertainties persist. Historically, stock prices often reflect future potential rather than current conditions. This explains why Home Depot's shares have remained optimistic since hitting a significant low last October, despite underwhelming quarterly results. The prevailing economic challenges are expected to subside eventually, allowing the retailer to regain its former strength.
Given the stock’s relatively high valuation, it's worth considering whether the market may have overestimated its current prospects. However, it seems unlikely that it has done so significantly.
Not everyone is on board with this perspective. The current consensus among analysts sets Home Depot’s price target at $381 per share, which is only about 5% higher than its current price - providing limited upside support.
Consumer behavior follows a cyclical pattern, yet many investors and analysts often fail to anticipate rebounds until they are clearly underway. By the time these recoveries become apparent, the opportunity to benefit from the initial upswing is often missed, as stocks that capitalize on economic recoveries may already be well into a significant upward trajectory. This phenomenon explains why Home Depot shares have shown strong performance recently despite seeming to lack immediate catalysts.
However, there are valid reasons for investors to be optimistic.
Consider the housing market. Sales of both existing and new homes are still near multi-year lows, constrained by high interest rates and elevated home prices. Yet, recovery appears imminent. The market anticipates at least four quarter-point reductions in the federal funds rate between now and early next year, which would likely lower mortgage rates. While home prices may not drop substantially, a forecast from Realtor.com indicates that home-price increases could moderate due to increased single-family home construction and a 14.5% rise in inventory.
Additionally, remodeling activity is set to rebound. According to Harvard University's Joint Center for Housing Studies, remodeling expenditures are expected to decline through early next year but should start to recover in the latter half of 2025. New home sales, though not robust, are also expected to pick up.
In essence, a crucial segment of Home Depot’s business - building and remodeling - is poised for recovery.
On a broader scale, the economic upturn should benefit Home Depot’s non-construction business. Despite a slight rise in unemployment and slower GDP growth, the Federal Reserve projects GDP growth to remain positive in 2025 and 2026. Even in a slow-growth environment, Home Depot can gain market share. Bank of America analysts Robert Ohmen and Molly Baum recently noted, “While the macro remains choppy, we expect HD to see continued share gains as it accelerates growth and capabilities with the complex pro.”
While Home Depot may not be the safest or cheapest stock available and carries above-average risk at a premium valuation, its size and transparency offer a clear view of its potential trajectory. Although the exact timing of improved conditions is uncertain, the market seems to be pricing in a future rebound. Thus, it is likely not too late to invest in Home Depot, even at its current valuation, as the company is expected to grow into a more reasonable price point soon.
As long as the price is above 360.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 365.50
- Take Profit 1: 375.00
- Take Profit 2: 385.00
Alternative scenario:
If the level of 360 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 360.00
- Take Profit 1: 350.00
- Take Profit 2: 340.00
