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Each week, we like to provide different investing/trading ideas that we believe investors and traders can use to help them. These ideas are short-term, long-term, and mid-term. Some ideas are hedges to long positions. Overall, these ideas will focus around trends that should develop this week and can provide investors with ample yield.

Ticker: Home Depot (NYSE:HD)

One stock we like heading into this week is Home Depot. The stock has a chance of a big week if housing data is solid. HD and other construction/home goods/housing plays have done quite well due to the housing recovery, and with a slate of housing data to be released this week, it could be time to look back at HD, which has fallen 5% in the last month. The stock has moved back to the 50-day MA where it has very solid support. HD is a better play in housing construction than Lowe's (NYSE:LOW), which is a better home remodeling play. After this pullback, HD has good value, a near-term catalyst, and upside potential.

Right now, the stock is sitting with an 18 future PE, which is a decent level for the company that has a beta below 1 at 0.83, a solid dividend yield at 2%, and expectations for decent growth moving forward. The company is expected to grow sales by 4% this year and 5% next year. The company has awesome near-term catalysts. We expect this week to continue to show that the housing market is still going strong, and it will help HD outperform the market (even if we have a down week).

For the week, the NAHB Housing Market Index is expected to grow as well as Housing Starts, both good indicators for HD. Additionally, we believe HD has continued cyclical growth due to the Hurricane Sandy housing reconstruction phase that is still expected to provide growth for HD through the end of June.

Look for HD to be strong this week, and we like buying on a break of the 20-day MA to show renewed strength.

Let's take a look at a common projection for five years to look at a potential 12-month price target that will help us understand how much HD's price can still grow.

Price Target Analysis

Step 1.

Project operating income, taxes, depreciation, capex, and working capital for five years. Calculate cash flow available by taking operating income - taxes + depreciation - capital expenditures - working capital.

2013 Projections

2014 Projections

2015 Projections

2016 Projections

2017 Projections

Operating Income

8750

10000

10800

11360

11750

Taxes

3238

3700

3996

4203

4348

Depreciation

1700

1750

1800

1825

1850

Capital Expendit.

-1300

-1250

-1200

-1250

-1400

Working Capital

0

0

000

Available Cash Flow

5913

6800

7404

7732

7853

Step 2.

Calculate present value of available cash flow (PV factor of WACC * available cash flow). You can calculate WACC, but we have given this number to you. The PV factor of WACC is calculated by taking 1 / [(1 + WACC)^# of FY years away from current]. For example, 2016 would be 1 / [(1 + WACC)^4 (2016-2012). WACC for HD: 8.06%.

2013

2014

2015

2016

2017

PV Factor of WACC

0.9254

0.8564

0.7925

0.7334

*

PV of Available Cash Flow

5471

5823

5868

5670

*

Step 3.

For the fifth year, we calculate a residual calculation. Taking the fifth year available cash flow and dividing by the cap rate, which is calculated by WACC subtracting out residual growth rate, calculate this number. Companies with high levels of growth have higher residual growth, while companies with lower growth levels have lower residual growth. Cap Rate for HD: 4.06%

2017

Available Cash Flow

7853

Divided by Cap Rate

4.06%

Residual Value

193411

Multiply by 20167PV Factor

0.7334

PV of Residual Value

141848

Step 4.

Calculate Equity Value - add PV of residual value, available cash flow PVs, current cash, and subtract debt:

Sum of Available Cash Flows

22833

PV of Residual Value

141848

Cash/Cash Equivalents

2494

Interest Bearing Debt

10756

Equity Value

156419

Step 5.

Divide equity value by shares outstanding:

Equity Value

156419

Shares Outstanding

1460

Price Target

107

As we can see, there is still a lot of potential in HD. We have looked at a projected growth rate of about 14-16% over the next two years and then that rate dropping significantly in 2015 - 2017. This model is leaning more towards best-case scenario, but with current prices around $76, there is a lot of potential in shares.

Buy Point: Over 20-Day MA

Target: $80, $85

(click to enlarge)

Ticker: Procter & Gamble (NYSE:PG)

With the market looking potentially like it could be weak soon, we like looking at some more low-beta names to give your portfolio a boost. If the Fed does push QE taper forward, the market could be hit. One stock that has corrected a bit and is now finding support and can do well during weakness is PG. The company has a beta at 0.44, which means that it moves at 4% of the typical market movement. So, during times of weakness, PG outperforms. During times of strength, it underperforms. With a lot of question marks, though, a play in PG looks interesting. The company has corrected strongly since the end of May (about 5%) due to some concern that the company will reguide at a lower rate than previous levels.

The company, currently, is expected to rise over 3% in sales growth in the coming FY July - June of 2013 and 2014. That level of growth is pretty strong for a large company like PG, and a lot of that growth is expected from a rebound in Europe, continued strength in the USA, and decent growth in emerging markets. With a recent correction bringing future PE to 18 and price/sales to 2.5, the stock is starting to look attractive. The company has a 3% dividend yield, and that dividend has grown for 57 straight years.

The long-term potential for PG is very solid. The coming next couple years for PG focus around building up the core business, strengthening its innovation program and pipeline, and returning value to shareholders. The company has decided to focus on its top 40 country/category combinations along with top 20 innovations. The company's top innovations provide the most potential for top line growth year/year along with developing markets. The company's top markets for growth is in emerging markets, and the recent change in CEO is because of this:

The headlines were about unhappy activist shareholders and U.S. margin declines, slower revenues, and brand loyalty. What the headlines failed to address is that P&G is an emerging market company and this is where their future is tied.

Right now they are losing the battle to local producers and Unilever (NYSE:UN). Procter & Gamble is an emerging markets company whether they want to be or not. The changes that are were (NYSE:ARE) demanded from shareholders logically tell you that.

They need to grow the top line by delivering in Asia, Latin America and the Middle East. The problem here is that despite having the right strategy, Bob McDonald did not execute successfully in emerging markets.

A quick look to the top line tells you that Procter & Gamble has actually done a great job moving overseas. In the last decade, North American sales have shrunk from 54% to 38%, while Asia has moved from 11% to 19% and Middle East Africa/Latin America has moved from barely registering to now 26%.

So, is the new CEO AG Laffey the right answer for emerging markets growth. Laffey's strength has always been in margin expansion and cost-cutting over international growth, but a focus on keeping costs down and returning margins is a start.

The company needs to also work on continuing to innovate. PG, for so long, was a beacon of innovation in creating new consumer categories and pushing the button on what customers wanted. As of late, that has not been as strong. The company notes innovation is key to them, but we need to see a push in R&D over the next 12 months to believe this can happen. Cost cutting usually means some to R&D, so watch for this.

With the market looking weak and things looking rough ahead in the near-term, we like PG for a bull put spread. The spread can allow us to make money even if PG is flat or goes down some, which seems likely with the market. If it drops a lot, we can take on shares as well. The Jul20 75/72.50 spread is offering over 20% potential gain, and $75 has not been broken since it was overtaken in February.

Trade: PG, Jul20, 75/72.50 Bull Put Spread

Max Gain: 20%+

(click to enlarge)

One stock we do continue to fear is Caterpillar (NYSE:CAT). CAT does not look very solid right now, and it will be hurt by a market correction. Despite a housing recovery in the USA, CAT has not been able to prosper due to its strong connection to trends in China. We called for a bear call spread in March on the company that would have worked for 14% gain. Right now, shares do look cheap. The company's future PE is 10.5 (we look for value under 15). Price/sales is under 0.9 (we look for value at 2.0). The PEG ratio is down to 0.8, meaning that the stock is even undervalued when we look at it compared to its growth prospects. Still, we cannot recommend getting back into it yet.

The issue is that the company is seeing weak trends in their business. They have seen a slowdown in mining. Weaker gold/silver prices are slowing down the craze to mine these minerals as well as many others. The company, last month, noted that Power Systems retail was down 5% and retail machine sales were down 9% in the February-April period. The key was Asia/Pacific was down 20%. The company's growth story is based on the fact that they can have success in Chinese construction. Without that demand, expectations come down a lot.

When does that demand start to come back? That is the question, and that is why share prices have suffered so greatly. We believe that share prices should start to come back when China starts to improve its trends, but that is the unknown. With that unknown, it is hard to expect share prices to rebound significantly. Investors need a catalyst, and they do not have one. Housing data this week could provide mid-term relief, but it may be just the small bounce that can be the perfect place to employ a bear call spread.

Let's take a look at a 12-month price target on CAT. The following is keeping capital expenditures low, counting on a strong bounce back in 2014, and strong depreciation expansion.

Price Target Analysis

Step 1.

Project operating income, taxes, depreciation, capex, and working capital for five years. Calculate cash flow available by taking operating income - taxes + depreciation - capital expenditures - working capital.

2013 Projections

2014 Projections

2015 Projections

2016 Projections

2017 Projections

Operating Income

7050

8100

8900

9750

10200

Taxes

2115

2430

2670

2925

3060

Depreciation

2900

3000

3159

3300

3450

Capital Expendit.

-5200

-5400

-4000

-4500

-4750

Working Capital

955

955

955955955

Available Cash Flow

1680

2315

4434

4670

4885

Step 2.

Calculate present value of available cash flow (PV factor of WACC * available cash flow). You can calculate WACC, but we have given this number to you. The PV factor of WACC is calculated by taking 1 / [(1 + WACC)^# of FY years away from current]. For example, 2016 would be 1 / [(1 + WACC)^4 (2016-2012). WACC for CAT: 8.09%.

2013

2014

2015

2016

2017

PV Factor of WACC

0.9254

0.8564

0.7925

0.7334

*

PV of Available Cash Flow

1555

1983

3514

3425

*

Step 3.

For the fifth year, we calculate a residual calculation. Taking the fifth year available cash flow and dividing by the cap rate, which is calculated by WACC subtracting out residual growth rate, calculate this number. Companies with high levels of growth have higher residual growth, while companies with lower growth levels have lower residual growth. Cap Rate for CAT: 5.06%

2017

Available Cash Flow

7853

Divided by Cap Rate

5.06%

Residual Value

96451

Multiply by 20167PV Factor

0.7334

PV of Residual Value

70803

Step 4.

Calculate Equity Value - add PV of residual value, available cash flow PVs, current cash, and subtract debt:

Sum of Available Cash Flows

10476

PV of Residual Value

70803

Cash/Cash Equivalents

5490

Interest Bearing Debt

40143

Equity Value

46627

Step 5.

Divide equity value by shares outstanding:

Equity Value

46627

Shares Outstanding

657

Price Target

71

The issue for CAT is that so much of their growth is needed from overseas expansion, and that has high capex needs. The company, additionally, has very excessive amounts of debt from this expansion as well. The company can only really start to look attractive if China really comes back strong, they produce strong FCF to pay off debt, and they can expand margins. The company's FCF/Sales sits at under 2%. We look for health at 10%, so the company is really not executing cash flow well.

Even with a small bounce, which we cannot expect fully, the stock has no chance of clearing 90 without a China play back on for the company. Right now, the Jul20 90/92.50 bear call spread is offering just fewer than 10%. We like this play to also help combat weakness in the market moving forward.

Trade: CAT, Jul20, 90/92.50 Bear Call Spread

Max Gain: 8%

(click to enlarge)

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: The Oxen Group is a team of analysts. This article was written by David Ristau, one of our writers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article

Source: Buy Home Depot And P&G This Week, Sell Caterpillar