With all the discussions lately of a recovery in housing starting to happen, Home Depot (NYSE:HD) seems like a natural way to play that recovery. Home Depot is one of the most popular retail outlets for home improvement and construction products and services. The stock is up over 23% year to date, but has it run up so far that it is no longer worth buying?
The housing recovery plays a large role into whether or not Home Depot stock continues to rise. If housing continues to improve, new home buyers tend to spend large amounts of money customizing and upgrading their newly purchased home.
The growth from the housing recovery has been significant, as a recent report from Home Depot shows first-quarter net income rising 18%.
Similar catalysts include the excellent steps Home Depot is taking, including buying back shares, opening up an estimated nine new stores in 2013, and improving margins. The dividend was also recently increased to .39 per share, which is an increase of 34%.
A value investor may find these shares slightly expensive currently, but others may see potential. Home Depot currently trades at a P/E of around 18, and a PEG of about 1.5. Typically I like to invest in companies with a PEG of around 1 or less, as I see it as extremely undervalued. In the case for Home Depot, the housing recovery may be more than enough of a catalyst to supersede the financial ratios.
Downsides include competition from retailer Lowe's (NYSE:LOW), as well as potential housing bubble speculations. Lowe's has been performing poorly of late, but I have a feeling it will eventually go back to being a competitor. It is important to note however that Home Depot has been consistently outperforming Lowes, nearly doubling its performance over the last five years.
There has also been significant coverage stating that the majority of real estate buying has been due to large Wall Street firms buying up properties in huge quantities. This could ultimately lead to another bubble, causing housing to yet again crash, taking Home Depot with it.
In conclusion, the housing recovery will play a significant impact on whether or not Home Depot continues to outperform. If you buy that the housing recovery is fueled primarily by Wall Street's large-scale buying of properties, then perhaps Home Depot isn't the stock for you. If you truly believe that Americans are buying properties again, and working on fixing up their homes, then Home Depot should be considered for your portfolio. At these current levels, I personally believe Home Depot has run up too much for me to buy right now. I will however consider Home Depot on any significant market pullback.
All financial ratios courtesy of Yahoo Finance.