In support of Home Depot - my response

Posted Jul 3rd 2006 11:36AM by Sheldon Liber
Filed under: After the Bell, Forecasts, Internet, Blogs, Rants and Raves, Competitive Strategy, Home Depot (HD), Berkshire Hathaway (BRK.A)

I recently received a comment to an article I wrote a while back questioning my favorable opinion of Home Depot (HD) where I stated that despite its poor performance this year I still felt it was a good core holding; thus I feel a "public airing" is in order.

The following was the comment I received on Thursday, June 29:
    Why would you list The Home Depot as a "solid company" and give people the impression it's a stock to buy or hold at this time?  Investors have had trouble with management, the board of directors, and the the direction the Home Depot is going.
   Price of HD stock has been declining since the first of the year. It hasn't been doing well over the last five years. This is a stock a person has to gamble on. Flip a coin, cut a deck of cards, roll the dice, then decide if you want to invest. There is no "solid" evidence that this is a "must have in my
portfolio" stock.
   Todays Home Depot is not the money maker of 5 or 10 or 15 years ago because it's not the same company.

My rational is based on metrics I use in evaluating stock investments for myself. I do not try and predict the future or advise anyone what they should do. I only bring to the attention of others what they might consider in evaluating for themselves those factors that contribute to successful investing over the long term.

My response (edited) to some valid concerns:

I appreciate your taking the time to comment but I think if you reviewed your stock facts you might change your mind. I would buy this company all day long in it's current situation without fear, as a long term hold.

1) It is at a 52 week low and a six year low which values it at the price it was before the housing boom. This is very reasonable, especially considering how many stores they have added and how much cash they have accumulated. You will also find when people stop buying they start remodeling and this will benefit them as well. I am not in the prediction business, but I do not feel this is a risky entry point as long as one is not putting in short term money. Short term money meaning money you might need for some other family obligation or safety net.

2) They have paid a consistent dividend and dividend stocks have historically beaten the market over the long haul and rewarded conservative investors.

3) Their P/S, price-to-sales ratio is less than one and this metric has been more important than P/E metric over entire history of the stock exchange as an indicator of long term appreciation and ROI.

4) Their P/E is 12.73 about 5 points less than the S&P average.

5) Their ROE, Return-on-equity is 24.6 and there ROIC, return-on-invested capital is 22.54. These are 35% higher than most blue chip or S&P companies. Any company that is earning double the rate of their P/E is doing an amazing job for their shareholders and will attract attention from other investors rewarding those that get in at the right time.

6) They have huge cash flow and no debt.

7) Any one of these factors alone might not make the case, but together I believe they do. And if none of these factors mean anything to you than forward your email to Warren Buffett because you should warn him as well...since it has been reported he's been buying the stock and perhaps shares my view.

Good luck in your investments and thanks again for writing.

Finally

The source for most of the data was the AOL Money & Finance Section for Home Depot (HD). The fact that Home Depot is out of favor may make it the right time to explore this company as an investment. If you want added margin of saftey just keep watching and buy it at a lower point, if the market goes there. Being that July is vacation month perhaps the market will see less volume and some lower pricing.

When someone raises legitimate concerns as this reader did I think a response is in order. In addition I think that this is an ideal use of the blog site so that we can all help each other learn and improve. Any other comments on the subject are most welcome. If I have overlooked something I certainly would want to know because HD is on my watch-list and maybe one of my readers will save me from experiencing financial pain. After all "experience is what you get when you were expecting something else".

Read more about me here

Tags: Cash flow, CashFlow, evaluating risk, EvaluatingRisk, Home depot, HomeDepot, Investing, learning, P/E, P/S, ROE, ROIC, Warren Buffett, WarrenBuffett

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Reader Comments (Page 1 of 1)

7-05-2006 @ 3:41PM

Edwin Blair said...

There's nothing wrong with this stock that would not be overcome by ousting a vastly overpaid Bob Nardelli as CEO and his mentor Ken Langone as Lead Director. Their imperial attitude has sent the average investor to the sidelines. But don't expect either of these arrogant officers to put investors first.Investors have lost trust in Home Depot because of two men.

7-12-2006 @ 4:02PM

Edwin Blair said...

The price of Home Depot stock continues to sink like a rock. Investors were told by prominent members of the board that all the new innovations and acquisitions made since Bob Nardelli became CEO would insulate the stock against a housing slowdown. Turns out the only thing that's been insulated is the bulging Nardelli compensation of $154-million.Nardelli can now say, "I took care of me. Now you suckers are on your own."

7-13-2006 @ 2:16PM

Don Wenzel said...

Home Depot needs to work on customer service if they want their stock prices to go up. If you do a search for Home Depot customer complaints you will find several sites about problems with the Home Depots customer service. As I found out with my roofing project they will take weeks to return phone calls or not return them at all. It has now been 10 months since my roofing project started and over $1,000.00 in damages to my house. You can see my web site at www.freewebs.com/myroof

Thank you
Don Wenzel
Oxford, Michigan