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Celebrate a Retail Resurrection with Home Depot Stock
Stock Analysis & Ideas

Celebrate a Retail Resurrection with Home Depot Stock

Atlanta-headquartered Home Depot (HD) operates a vast network of home-improvement product stores in the U.S. I am bullish on the stock.

If any store stands at the crossroads of the American retail and home-buyer markets, it’s Home Depot. When people are in the mood to fix up homes to sell them or just to beautify their living spaces, they flock to Home Depot.

With supply-chain bottlenecks and high inflation wreaking havoc on the home-builder and retail markets, however, there’s no guarantee that Home Depot will thrive in 2022. Indeed, pervasive fear in the financial markets has brought Home Depot stock down from its peak price.

On the other hand, an argument could be made that the American retail consumer is making a comeback despite the aforementioned macro-level challenges. In that context, Home Depot stock almost serves as a gauge of the health of the U.S. economy.

Even in tough times, U.S. consumers have a way of bouncing back, and that’s good news for stock traders in general. Regarding Home Depot stock in particular, there’s still-fresh data to support the retail shopper’s resilience, and the stock’s upside potential.

High Prices Lead to Low Prices

It’s all over the financial headlines: two consecutive months of 8%+ annualized U.S. Consumer Price Index growth. It’s shocking, and even more surprising is the price of lumber this year compared to what was considered normal just a couple of years ago.

Steel, copper, aluminum, and other essential materials also have elevated prices in 2022. Without a doubt, higher commodity prices have weighed on Home Depot’s bottom line, as well as the company’s share price.

This would help to explain why Home Depot stock recently came down to $300 from a 52-week high of around $420. It’s a steep decline, and inflation concerns, coupled with supply-chain woes, might dissuade some folks from investing in Home Depot now.

Yet, there’s another way of looking at this situation. Ongoing challenges have caused low share prices, and Home Depot’s trailing 12-month P/E ratio of 19.55 should make the stock attractive to value investor. Also, Home Depot pays an annual dividend yield of 2.57%, so you can collect the dividend distributions and reinvest them into more shares.

It’s also worth noting that Home Depot stock’s five-year monthly beta of 1.04 means that it’s a low-volatility stock that you can hold if you’re worried about a stock market crash. After all, Home Depot survived the Great Recession of 2008-2009 as well as the COVID-19 crisis of 2020, so the company should have no problem getting through the inflation crisis of 2022.

Still, informed investors should want to see the hard data before committing capital to Home Depot stock. Fortunately, there’s fresh data available and it’s overwhelmingly positive – and it suggests that the U.S. retail sector might not be in too much trouble, after all.

Off to a Strong Start

When Home Depot issued its earnings report for the first quarter of fiscal 2022, the stakes were high but thankfully, the company passed muster in the most important areas.

Home Depot CEO and President Ted Decker set the tone for positivity when he declared, “Fiscal 2022 is off to a strong start as we delivered the highest first quarter sales in Company history.” Indeed, Home Depot’s quarterly net sales of $38.9 billion are impressive, and represent a 3.8% year-over-year increase.

Decker acknowledged the “challenging and dynamic environment” in which his company achieved this result. Without saying it directly, he was probably referring to the supply-chain and inflation issues that have created problems for so many retail stores this year.

This makes Home Depot’s $4.2 billion quarterly net earnings, which signify a 2.1% year-over-year increase, all the more impressive. Also notable is Home Depot’s 2.2% comparable sales growth, as well as the company’s 1.7% U.S. comparable sales growth. These are important figures as comparable sales growth is an essential metric for retail businesses.

To cast Home Depot’s bottom line in a different light, we can observe that the company’s quarterly net income of $4.09 per share easily beat the analysts’ consensus estimate of $3.69 per share. So, when Decker says that Home Depot’s fiscal year is “is off to a strong start,” there are observable data points to back up his contention.

Wall Street’s Take

According to TipRanks’ analyst rating consensus, HD is a Strong Buy, based on 16 Buy and three Hold ratings. The average Home Depot price target is $358.78, implying 19.22% upside potential.

The Takeaway

Home Depot is a true survivor among American retail businesses. Even if the home-building industry rolls over and the U.S. inflation rate takes a while to subside, Home Depot will have staying power and so will the U.S. consumer.

For value investors, Home Depot stock is very reasonably priced after its steep downturn. Meanwhile, income investors can buy and hold the stock to collect the regular dividend distributions.

Finally, you can simply buy Home Depot stock because the company is resilient even during challenging times. The data supports a long-term stake in Home Depot stock, so don’t hesitate to be a do-it-yourself-er and build your own stock position today.

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