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Home Depot: Has it reached a bad news bottom?

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When stocks rise on seemingly bad news, it is a "pretty good indication" that the stock has bottomed, observes Chuck Carlson, editor of The DRIP Investor.

In this case, the stock that may have bottomed is Home Depot (NYSE: HD), which has held up well despite poor earnings, poor guidance, and generally poor prospects for the housing sector.

The company recently reported a 5% drop in same store sales, notes Carlson, and the "pain" is expected to continue into 2007. For the fiscal fourth quarter, the company has forecast a 12% to 16% drop in earnings per share and a gross margin decline.

Says Carlson: "Despite the tough earnings report and weak near-term outlook, these shares held tough and even bounced a bit on the news."

Meanwhile, the advisor sees "ample value" in the shares and expects the stock to perform much better in the year ahead. He also notes that the firm "sweetened the dividend pot" for its shareholders by recently announcing a 50% increase in the dividend. Indeed, he points out, this was the second time in 2006 that the company boosted its dividend 50%.

Incidentally, in Carlson's newsletter, DRIP refers to dividend reinvestment plans; his service focuses exclusively on quality stocks that offer these programs. DRIPs provide a low-cost way for individuals to acquire shares. For example, at Home Depot, the company's direct-purchase plan has a minimum initial investment of $500, with subsequent investments that can be as little at $50.

Steven Halpern is the editor of TheStockAdvisors, a free daily overview of the latest investment ideas from the financial newsletter community.

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Last updated: November 25, 2009: 10:32 AM

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