3 Reasons Why Home Depot Shares Are Poised For A Sharp Drop By Year-End

| About: Home Depot, (HD)
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Hurricane Sandy has impacted a number of stocks both negatively and positively. One big beneficiary of the storm has been the shares of Home Depot, Inc. (NYSE:HD). Investors expect this nationwide home improvement retailer to cash in on increased sales on pre-storm purchases like plywood and generators to post-storm rebuilding and cleanup efforts. While there is no doubt that it has seen a positive short-term benefit from the storm, there are also some offsets to this benefit and reasons why the pop in the stock will probably be short-lived. While this stock is still trading very close to 52-week highs, investors should consider cashing in on the gains. Here are 3 reasons why the stock is likely to decline by year-end:

1) While the storm has undoubtedly caused a short-term spike in business for Home Depot, there are some offsetting negative factors to consider in the mid to long-term. For example, construction projects that were already started might have been disrupted and delayed. New projects that were due to be started soon are more likely to be postponed or even canceled due to financial impact issues and because construction labor is now busy with rebuilding instead of remodeling. Furthermore, the benefit of the storm might be more muted than investors realize since this is a company that operates across the United States. For example, the benefits from the storm are not going to be felt at Home Depot stores located on the West Coast or Midwest. In a few weeks, the Hurricane Sandy headlines are likely to fade, along with the short-term spike it caused in generator and plywood sales.

2) As investor concerns turn towards 2013, the impact of higher taxes for capital gains will cause many shareholders to sell stocks that have appreciated significantly. Home Depot stock has created many millionaires over the years, and more recently, it has also nearly doubled off the 52-week lows. Capital gains tax rates are likely to increase significantly in 2013, so the next few weeks could see heavy selling for stocks like Home Depot as investors cash in on gains before taxes rise.

3) Aside from the two points above, this stock appears expensive. It
is now trading at about 20 times earnings while the average stock in
the S&P 500 Index trades for just around 14 times earnings. It also
offers a below average yield of just 1.9%, while the average stock
yields over 2%.

Investors who adhere to a buy low and sell high mentality should consider taking profits in this stock now. Many investors have significant gains in this stock for 2012 and there is a good chance they will be increasingly inclined to lock in those gains before the year ends and before higher tax rates come into play.

Here are some key points for HD:
Current share price: $60.86
The 52 week range is $36.41 to $63.20
Earnings estimates for 2012: $2.97 per share
Earnings estimates for 2013: $3.38 per share
Annual dividend: $1.16 per share which yields 1.9%

Data is sourced from Yahoo Finance. No guarantees or representations
are made. Hawkinvest is not a registered investment advisor and does
not provide specific investment advice. The information is for
informational purposes only. You should always consult a financial

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any 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.