Is Home Depot's Uptrend Genuine?

Posted Sep 28th 2010 1:30PM by Joseph Lazzaro
Filed under: Home Depot (HD), Stocks to Buy

The wild ride with Home Depot (HD) first discussed on May 20, 2009 at a price of $23.83, continues, and for those managed to withstand 2010's gyrations, it appears better days are ahead.

After peaking at about $37 in May, HD promptly nose-dived to $26. No doubt some of that selling reflected institutional investors exiting positions, on so-so housing sector progress, after the U.S. home buyer tax credit ended on April 30.

If you held HD, just look on the above move as 'shaking all the short-term money out of the stock' -- preparing a base for a sustainable stock price increase, assuming the U.S. economy does not fall in to a double-dip recession. Here's why:

Look for HD to post a 2.5-3.0% revenue increase in FY2011, after a 7.2% decline in FY2010, on better international store performance, and about 10 net new stores opened. U.S. store traffic should gradually improve, but big-ticket remodeling revenue will remain sluggish in today's 'frugal consumer' U.S. market.

Further, Home Depot's customer service improvements should help generate customer loyalty, and the U.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 in the same residence for awhile.

The Thomson Reuters First Call FY2011/FY2012 EPS estimates for STD are $1.91 to $2.20.

Technically, HD's move back above the key, 50-day moving average and the $30 level are encouraging.

However, the bearish argument says the recent rise could be short-covering, hence, I'd raise the sell/stop loss to $24 from $16 to guard against it. That makes HD a zero-loss trade for your May 2009-bought shares.

2010 Outlook: I view the Home Depot as a long-term play, but if investors are looking to sell HD within the year, it's probably best to take your profits after it rises to $38-39, if it fails to clear $40.

Stock Analysis: I consider Home Depot to be a moderate-risk stock. If an investor has already purchased the company's shares, I'd hold them. If not, I'd consider buying a 25% position in HD now; then buy another 25% in one month, if U.S. economic conditions don't worsen substantially. Under any circumstance, I wouldn't buy more than 50% of my HD position before November 2010 and I'd put a sell/stop loss at: $24.

Disclosure: Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.

Tags: HD, Home Depot