Home Depot: Wait For A Bottom To Form

Summary

• The current market environment has changed to one favoring larger, well-managed companies.
• Home Depot's financials clearly fit that bill.
• However, the stock is still in a downtrend.

Justin Sullivan/Getty Images News

Home Depot is a great well-managed company. But the stock is still in a downtrend.

The tone of the market has clearly changed. Even before the war in Ukraine, the sentiment was shifting towards a more defensive posture due to the more hawkish Fed. The Ukrainian situation has simply made this more important. This makes larger, more established companies more attractive for investors.

Home Depot fits that bill. Here's a brief summary of the company:

The Home Depot, Inc. operates as a home improvement retailer. It operates The Home Depot stores that sell various building materials, home improvement products, building materials, lawn and garden products, and decor products, as well as provide installation, home maintenance, and professional service programs to do-it-yourself and professional customers. The company also offers installation programs that include flooring, cabinets and cabinet makeovers, countertops, furnaces and central air systems, and windows; and professional installation in various categories sold through its stores and in-home sales programs, as well as acts as a general contractor to provide installation services to its do-it-for-me customers through third-party installers.

There are nine publicly traded home supply stores. Home Depot (NYSE:HD) is the largest; it is twice the size of its largest competitor, Lowe's (LOW).

The company recently completed its purchase of HD Supply:

On December 24, 2020, we completed the acquisition of HD Supply for total purchase consideration of $8.7 billion. HD Supply is a leading national distributor of MRO products in the multifamily and hospitality end markets. The acquisition was funded through cash on hand, a portion of which was replaced with the proceeds from our issuance of $3.0 billion of senior notes in January 2021.

One of my favorite terms is "deworsification," which was coined by Peter Lynch in his book "One Up on Wall Street." He uses that term to describe an acquisition that makes no sense from the corporate strategy perspective. For example, Home Depot purchases a cosmetics company. This purchase is clearly not an example of that. In fact, it broadens the company's already impressive footprint.

The current environment (slower growth, rising rates, more volatility) means investors should focus on solid fundamentals. Home Depot's couldn't be better.

Home Depot gross revenue (Seeking Alpha)

The company's revenue has increased in each of the last 10 years.

Home Depot income statement percentages (Seeking Alpha)

The above spreadsheet has the company's gross, operating, and net profit margins. In a safety-oriented environment, we want to see consistency, or, better yet, rising numbers. Home Depot has both. Gross revenue has been incredibly consistent for the last 10 years while the operating and net profit margins have grown.

Home Depot cash flow and dividend safety (Seeking Alpha)

The above table uses data from the cash flow and income statement. The third row from the top shows the amount of cash remaining after the company pays for its investments. All the figures in that row are emboldened in green, indicating a positive number, which, in turn, means the company is self-financing. The fifth row from the top shows the amount of cash after the company pays its dividend. Again, all the figures are emboldened in green. Finally, the bottom row shows the total amount of cash after interest and dividends are deducted from EBITDA. Again, these are all green.

That leads us to the charts:

Weekly and Daily HD Charts (Stockcharts)

The left chart is a weekly chart. It shows that the stock has broken support and is now below the 50-week EMA. The right chart shows that the stock printed a double top at the end of last year. In the latest market sell-off, the stock broke below the 200-day EMA on high volume. There is currently no clear bottoming pattern forming.

According to Seeking Alpha, the stock is currently paying a dividend of 2.41%. This should help the stock eventually form a bottom. But right now, none is forming. Until we see a clear formation, hold off.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.