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How Home Depot is Getting it Done

28 November 2012 in Trading Ideas

It’s probably safe to say that when your stock has climbed more than 54% in 2012 – outperforming Apple (AAPL) by eight percentage points, by the way – you’ve probably gone a long way in satisfying your shareholders.

Here’s an end-of-year toast to you, Home Depot (HD).

That staggering stock performance didn’t just start on New Year’s Day, however. The home-improvement retailer’s shares have surged 75% in just the last 12 months. The company’s profit report two weeks ago provided another boost. Home Depot beat analysts’ third-quarter earnings and revenue expectations and boosted its outlook for fourth-quarter profit.

Since that announcement, Home Depot’s stock has risen another 4.4%, hitting a 52-week high last week. The rise has also contributed to the relatively strong performance in the past month of two motifs, Home Improvement, which is up 6.1% and Rebuilding After Sandy, which has increased 2.7%.

(Home Depot shares have a 27.6% weighting in the Home Improvement motif and a 7% weighting in the Rebuilding After Sandy motif).

That Hurricane Sandy connection has been no small part of the recent equation for Home Depot – and for rival Lowe’s (LOW), which is up 14% in the past month. As the extent of devastation became evident, many analysts and investors projected a benefit for the home-improvement sector, an idea that was essentially confirmed by Home Depot when it said it sold $70 million of batteries, flashlights, generators and extension cords in the last week of October alone.

The company ultimately said it expects it will generate as much revenue as it did from last year’s Hurricane Irene, which led to $360 million in sales.

But let’s face it, the main push higher in Home Depot has likely been the turnaround in investors’ perception of the housing market. And these days, that perception is quite favorable, given the generally upbeat data on housing starts and prices. On Tuesday, for example, the Case-Shiller Home Prices Index showed a fourth consecutive month of year-over-year price increases – for the first time since 2010.

Home Depot itself crystallized the relationship quite well during its earnings call, with CEO Frank Blake saying that he sees the housing market finally becoming “an assist to our growth rather than an anchor.”

For shareholders of Home Depot, the interplay has worked very well for more than a year. The next question for investors may be to determine whether the speed of the housing recovery is justifying the sustainability of Home Depot’s stock-price increase.

Last month, Oppenheimer analyst Brian Nagel downgraded the company’s stock, citing its huge runup that appeared to outpace the rate of housing recovery.  Nagel said he expects Home Depot shares to “take a breather,” with shares trading “sideways” for a while with the housing recovery already reflected in the current price.

In addition, it seems reasonable to assume that any downbeat housing data to come would remove a leg of support for a bullish defense of the stock.