Home Depot is bringing the DOW down, but they got Flavor

The Home Depot, Inc. (Public, NYSE:HD) is one of the 30 stocks that make up the Dow Jones Industrial Average. It's also one of the worst performers in the DOW when you consider that since mid July the stock is down 16% and down 13% in the last month. With the DOW now pushing past 14,000 and about two-thirds of the investment community saying we are going to keep running with the Bulls, doesn't Home Depot stand to benefit from the momentum?

 

Shares of the mammoth home improvement retailer are just above it's 52-week low of $31.85 and a far cry from the high of $42 a share. HD is trading around $33 a share and with the home building industry hit hard by the subprime fueled slowdown, the share price is justified. Home Depot recently got hurt by Lowe's Companies Inc (LOW) announcement last month that their full-year profit could trail its forecast. Lowe's said that earnings for the year ending in February could be at the low end or slightly below a range of $1.97 to $2.01 a share it forecast in August. Analysts were expecting profit of $1.99 a share, flat with the year before, according to Reuters Estimates. Lowe's, the No. 2 home improvement retailer behind Home Depot Inc (HD), said droughts in some parts of the United States were hurting sales, which were already under pressure from the housing woes.

Home Depot plans to close 11 landscape stores affecting 380 workers this year and despite the housing slump, they have no plans to close any of the company's more than 2,000 core retail stores. So how can the stock move?

Momentum my dear Masters, by the momentum of the DOW. Big money is coming back to U.S. stocks and they are looking for bargain buys, HD is one of them. The Depot has a $65 billion market cap and they brought home $90.8 billion in revenue in 2007. Sales are slowing but this company is an American staple in the economy and the DOW, they aren't going anywhere. Let's say the analysts and Flavor Flav's on Wall Street are wrong, and the market does start to tank, wouldn't you rather be in a beat-up stock that doesn't have as much to lose? Of course you would. I'm not saying to put your entire 401(k) into HD, but consider that long-term, the stock is coming back. If Flavor Flav can make a comeback and become King of VH1, you bet Home Depot can raise it's stock price.


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Should you buy Lowe's or Home Depot? Who cares. Buy both.

If you ask Todd Sullivan from ValuePlays, he thinks Lowe's is the winner as does the majority of Wall Street analysts. Home Depot is the No. 1 Home Improvement Retailer in America and Lowe's comes in at No. 2. However when you consider Lowe's shares are only down 9% since May, I can understand if you side with Lowe's. Home Depot's P/E is 13.21 and Lowe's is 14.28, so at current trading levels, both are at good entry points if you think this sector is worth buying.

The American home building industry will come back, it's not going to die. Yes it's badly hurt thanks to the idiot lenders around the country, but you can count on HD making money, no matter what the economy does. Home Depot is always full of people, every time you go in there, there are tons of shoppers buying this and buying that. The Depot is operating in China now and it's not going that great, but with world domination on the mind, I like the odds.

Bottom line - If the Bull run continues, HD shares are going to benefit. If the Bears take over, great, HD shares will get even cheaper. But the long-term outlook on HD -- They Got Game and I like the flavor. Don't Believe the Hype (click to watch video) - HD is money in the bank.

Frank Lara Jr.

Article written by: Frank Lara Jr.
Article posted on: October 2nd, 2007

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