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What? Buy The Home Depot (NYSE: HD) after it reported Q1 EPS of 35 cents -- it beat the First Call Q1 EPS estimate of 29 cents – but failed to raise guidance? Indeed, the Buy rating has been generated. Here's why: Home Depot's Q1 sales fell 9.7% and same store sales declined 10.2%. Those are pretty bad totals for key metrics, and of course the stock sold off some Tuesday, with short-term players taking profits. However, unless you believe the U.S. housing market and economy is likely to remain in recession for more than two quarters, those low sales totals sat up easier comparisons for next year, and the stock pull-back represents a buying opportunity.
Hence, the argument forwarded here is that the U.S. housing market is approaching a bottom, and that fact, combined with lower job lay-offs, will begin the long, incremental process of revenue gains at HD. However, this is not to say that the U.S. will return to the leverage-fueled home renovation and home building days of 2002-2007, but renovations should pick up enough to propel HD's sales and earnings higher. The First Call FY 2010/FY 2011 EPS estimates for HD are $1.35 to $1.53.
Other positives: Home Depot's customer service improvements should help generate customer loyalty, and the U.S.'s aging stock of homes also bodes well for HD. Like those Americans who can't buy a new car, those aging homes (like used cars) will have to be maintained, as homeowners may be living there for awhile.
That said, HD remains a high risk stock, and any hint that the U.S. economy will not recover in the second half of 2009 will send shares tumbling, so a tight Stop has been deployed. Technically, HD's chart also displays double-bottom support around $17.
Stock Analysis: The Home Depot is a high-risk stock. Don't Buy HD if you can not tolerate high risk. Consider buying a 25% position in HD now; then buy another 25% in three months, if U.S. economic conditions don't worsen substantially. Under any circumstance, don't buy more than 50% of your HD position in the first half of 2009. Sell/Stop Loss if you were to buy shares in this company: $16.
Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.
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