In this piece, we used TipRanks’ Comparison Tool to compare two “perfect” Smart Score stocks — Home Depot (NYSE:HD) and Deere (NYSE:DE) — that may be worth a second look. TipRanks’ proprietary Smart Scores are a great way for self-guided investors to gauge the quality of investments at any given time. With such a rocky bear market and a looming recession, emphasis on quality fundamentals is vital.
Looking ahead, many firms will have to prepare to sail through a hailstorm as a result of higher interest rates. As inflation levels remain elevated, it’s the “wonderful” businesses at a fair price that may be worth nabbing, rather than the fallen knives that are less likely to bounce back quickly.
I think it’s safe to say that many speculative (and unprofitable) growth stocks that slipped last year will never see their peaks anytime this decade. Some fallen stars may never flirt with highs again in their lifetimes. As bleak as that may sound, investors should mute their expectations as we inch into one of the longest-lasting recessions since 2008.
Amid waves of analyst downgrades, many firms have seen their Smart Scores take a step back. Indeed, how Wall Street views a stock is just one of many intriguing factors that go into yielding a Smart Score.
A “perfect 10” Smart Score is quite rare, but they do exist, even in today’s volatile market environment. Though such scores could drag as we enter a recession year, investors should view such names as top-of-the-line stocks worthy of your radar.
Home Depot is a home improvement stock that’s endured quite a nasty slip this year, tanking almost 30% year-to-date. That’s a decline that’s much larger than the S&P 500. As consumers delay big home renovations and improvement projects until after the recession, it’s Home Depot that could see sales erode suddenly.
Though it will be hard for Home Depot to “manage” its way out of an economic hailstorm, it’s worth noting that management has done so many things right. The long-term growth profile is still intact. The coming recession will just act as a temporary but deep pothole that Home Depot must drive through. Investors will feel the bump. However, beyond the pothole is a fairly pleasant road to higher levels.
Regent Atlantic’s Andy Kapyrin stated that Home Depot is one of the “best managed” big-box retailers out there. It’s hard to disagree, even as the housing market begins to cool off and discretionary firms look to take a larger tumble than the market averages.
At writing, shares of Home Depot trade at a modest 17.3 times trailing earnings and 1.8 times sales. Undoubtedly, margin-enhancing initiatives could take a backseat as sales look to take another turn lower. Regardless, strong stewardship and a wide moat in the home improvement space should allow HD stock to see new highs again, irrespective of how severe and long-lasting the next economic downturn is. The same can’t be said for many speculative companies whose fundamentals pale compared to the blue chip.
Is HD Stock Overvalued?
Home Depot doesn’t just have a perfect TipRanks Smart Score; it has the confidence of Wall Street. The consensus rating on the name is a “Strong Buy.” This is based on 15 Buys and three Holds assigned in the past three months. In the face of a recession, it’s remarkable that analysts are standing by the firm. With an HD stock price target of $362.53, a solid 28.5% gain is projected for the next year.
Deere is another discretionary that sports a perfect Smart Score grade. The legendary farming-equipment maker has been on a choppy ride since peaking back in March 2022. Down around 21% from its peak, Deere seems to be weighed down by forces outside management’s control.
A recession never bodes well for durable equipment demand. Though Deere equipment is top-of-the-line, it’s tough to justify a hefty expenditure in the face of market chaos. Despite the recession, I view Deere and the farming industry as less correlated to the broader economy.
At the end of the day, crop prices and efficiency gains to be had from farming equipment purchases can help Deere power through a downturn. If a new piece of machinery can help improve productivity or lower costs, such an investment makes sense in any environment through the eyes of a farmer.
Further, Deere is differentiating itself as a pioneer within the niche agri-tech scene. Morgan Stanley recently praised Deere for its “durable growth path.” They expect farm profitability to come in on the higher end in two years. In addition, Morgan Stanley sees replacement machinery demand higher than consensus estimates.
Indeed, it may not seem to make much sense to buy a durable discretionary like Deere in the face of a recession. Given prudent tech investments to save farmers time and money, though, I do view Deere as a candidate that could be spared from further market carnage this time around.
The stock trades at 17.3 times trailing earnings and 2.1 times sales. That’s cheap for such a fundamentally-sound company with strong catalysts ahead of it.
Is DE Stock a Buy?
Wall Street loves Deere, assigning it a “Strong Buy” consensus rating based on 12 Buys and five Holds assigned in the past three months. The average DE stock price target of $407.50 implies 17.8% upside potential from here. Clearly, Morgan Stanley isn’t the only firm upbeat on the farm equipment kingpin.
Conclusion: Investors Expect More from HD Stock
Home Depot and Deere are fundamentally-sound firms that deserve their perfect 10 Smart Scores, in my opinion. Between the two, investors expect more upside potential from HD stock.