Source: PaxForex Premium Analytics Portal, Fundamental Insight
The stock market decline in 2022 reflected mirrored the decline in the gross domestic product (GDP), a key indicator that measures the value of goods and services produced by an economy. In the first quarter, real GDP (adjusted for inflation) fell 1.6%.
Although the economy has not yet officially entered the recessionary territory, it is headed in that direction. The National Association of Home Builders (NAHB) expects real GDP to fall at least 1.5% in the second quarter.
About 90% of Home Depot's business comes from homeowners, either directly from do-it-yourself customers or indirectly through professional contractors. When the economy is weak or home prices are falling, it can have a negative impact on company sales.
However, a weak economy does not mean that investors should avoid Home Depot. There are several reasons why investors should expect that buying the stock at current price levels will bring them at least a decent profit.
The U.S. economy has experienced many recessions over the past century, but none as severe as the 2008 mortgage crisis. Home Depot's revenue fell 8% that year and continued to fall throughout 2009 before starting to rise again.
The recession of 2008 was the most serious test for Home Depot's business. Although the company withstood those tests, Home Depot could face similar pressure on its top line performance if consumer demand suddenly declines.
Other data released by the NAHB shows that the weakening economy is beginning to affect consumers' willingness to spend money on their homes. The NAHB/Westlake Royal Remodeling Market Index (RMI) ended the second quarter at 77, down 10 points year over year. A reading above 50 is good, so overall demand for home remodeling projects is still strong.
However, Home Depot has already begun to feel the negative effects of economic factors. Company executives said that rising commodity prices caused by cost inflation put pressure on average order values last quarter. This contributed to a 3% year-over-year increase in comparable sales, up from 8.1% in the fourth fiscal quarter of 2021.
Expectations of slowing revenue growth have caused Home Depot's stock price to drop 28% since the beginning of the year, but this could be a great buying opportunity. Just because earnings may suffer during a recession doesn't mean the stock can't rise.
From the fiscal year 2006 to 2012, Home Depot's revenues fell 7.8%, but the stock is still up 64% in that time period. There are several reasons why the stock should recover from this episode as it has before.
Home Depot has done an excellent job of allocating capital in a way that adds value to the business. Over the past 10 years, profit margins have risen from 6% to 11%. Given management's recent investments in new fulfillment centers and supply chain improvements, investors should expect Home Depot to continue to grow profits over the next decade.
One of Home Depot's top priorities is expanding its delivery network to cover 90% of the U.S. population with same-day or next-day delivery, including large and heavy items.
While Home Depot is not recession-proof, as sales may decline when the housing market weakens, it is still a sound investment for the long term. Management has not stopped looking for ways to strengthen the business, so investors should expect Home Depot to come out of the recession stronger than before.
Also, a bonus is that Home Depot pays out more than 40% of its profits to shareholders in the form of dividends. Thus, thanks to low valuations and a corporate culture that never slacks off, the stock is a great investment.
As long as the price is above 295.00, follow the recommendations below:
- Time frame: D1
- Recommendation: long position
- Entry point: 299.40
- Take Profit 1: 310.00
- Take Profit 2: 318.00
Alternative scenario:
If the level of 295.00 is broken-down, follow the recommendations below:
- Time frame: D1
- Recommendation: short position
- Entry point: 295.00
- Take Profit 1: 290.00
- Take Profit 2: 283.00
