Chasing Value: 2010 -- #4 Home Depot

A new year is upon us and a lot has changed. The residential market and unemployment, if not stabilized, it is at least less bad, and should recover to an extent by spring -- just when the commercial markets shock waves may hit.

Home Depot enters this environment in very good shape with improved management and customer service, yet still leaner and meaner. Investors should not only appreciate the yield, but also a very low price-to-sales ratio of 0.54 along with a double digit ROE of 12.78.

In my ten part series searching for this year's contenders I wrote that both Lowe's and Home Depot will benefit from a healing economy. But HD will see greater, immediate reward than Lowe's because it has far more stores in place. And since it has similar metrics with a yield that is twice that of LOW, I might as well take it.

Even if the economy remains sluggish, and I think it will, HD will be selling goods to consumers that have postponed buying needed items and doing repairs. A high foreclosure rate with growing bank receiverships would only add to demand as they seek to maintain their assets from deteriorating further in value and to prepare them for sale.

As the following chart indicates, Home Depot was 120% higher ten years ago.



It is my belief that HD, with only one major competitor, will flourish even in a lackluster economy and that it has the potential to return 50% gains over the next 24 to 30 months. It will take a lot less than that to beat the market in 2010. It might also add some comfort to know "my pal Warren" has loaded up Berkshire Hathaway (BRK.B) with the stock.

Home Depot ended the trading day, December 29, 2009 at $29.27.

For the other nine picks see: Chasing Value: 10 Stock Picks for 2010

Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an & planning firm. He writes the columns Chasing Value and Serious Money. Disclosure: I do not own shares of HD.