Home Depot: A Beautiful Boring Stock to Navigate a Bear Market
At the time I’m writing this, shares of Home Depot (NYSE:HD) are changing hands for just under $300 a share. That’s about 10% above the company’s 52-week low, but more than 50% below the company’s 52-week high.
This means that investors are lumping HD stock with some of the biggest names in big tech. However, with rising mortgage rates weighing on the housing market, there is reason for concern. The housing market is always a leading indicator of the general health of the economy.
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So whether we’re calling two consecutive quarters of negative GDP growth a recession or not doesn’t really matter. Consumers let you know with their behavior. And that behavior frequently becomes clear to investors during earnings season.
Home Depot doesn’t report earnings for another couple of weeks. However, the profit warning issued by Walmart (NYSE:WMT) in the last week of July may be a preview of things to come for the home improvement retailer. However, as is the case with Walmart, there are still reasons to hold onto HD stock. And in this article, I’ll go over a few of those to help you decide if HD stock is a viable choice for your portfolio at this time.
Are Mortgage Rates Really the Story?
It’s only natural to make an inverse correlation between interest rates and home improvement stocks. However, on the company’s last earnings call, Richard McPhail, Home Depot’s Chief Financial Officer & Executive Vice President explained why the bears may have to find another argument.
As McPhail points out, the company’s addressable market is approximately 130 million housing units. Out of those units, approximately 95% of those homeowners are not moving. Not only of those homeowners who have mortgages, over 90% have fixed-rate mortgages.
Those homeowners are only concerned about interest rates when they consider selling. And with mortgage rates on the rise, homeowners are deciding to stay in their recent home (albeit with a few improvements).
Operating Margins are Staying Strong
In the first quarter, Home Depot’s operating margin was down just 0.2% on a year-over-year basis. This was despite the effects of inflation which includes planned increases the company was making in wages. However, the company did say they managed to offset some of their higher costs with improvements in operational efficiency.
Home Depot’s Omnichannel Investment is Paying Off
The Covid-19 pandemic saw a rapid change in consumer behavior. With shelter-in-place orders in effect, there was a surge in e-commerce activity. Not surprisingly, the companies that came out in good shape were the ones that had already invested in their digital capabilities.
Home Depot was one of those beneficiaries. Prior to the pandemic, the company was already experimenting with the BOPUS (buy online and pick-up at the store) model. It was also engaging in home delivery. That investment paid off in a big way as demand for all things home improvement surged in 2020 and 2021.
And while there is some evidence that e-commerce growth may be receding to more normal levels, consumers are unlikely to change their habits, particularly when it comes to the convenience of having home improvement material delivered to their doorstep.
History Suggests That HD Stock May be a Buy
In the last five years, HD stock has rewarded investors with total share price growth of approximately 101%. That doesn’t take into account the company’s dividend which has been growing on an annual basis of approximately 2.5% in that same period.
At this point, analysts are projecting growth in earnings and revenue to slow considerably in the next five years. However, the dividend payout ratio of approximately 48% may be sustainable, particularly if the company can maintain its operating margins.
In any event, if the housing market stays soft, Home Depot may not be the most exciting stock. On the other hand, this is a time when boring can be beautiful.
Article by Chris Markoch, MarketBeat
Updated on Jul 29, 2022, 5:12 pm