Home Depot: Is the Growth Boom Talk Real?

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On Saturday, Barron’s writer Avi Salzman argued that Home Depot (NYSE:HD) shares could rise as much as 25 percent. He cites the following:

  1. The housing market is improving.
  2. The shares have underperformed year over year versus the S&P 500.
  3. The company is taking market share.
  4. The company is generating an excellent return on equity: 35.5 percent.

This sounds fine on the surface, but in fact, I would argue that there are significant issues with this analysis.

First, the stock is up nearly 200 percent over the past five years. Why have Barron’s and Mr. Salzman waited until now to recommend the stock? Mr. Salzman has just started analyzing it, which means that we cannot look at his track record for predicting Home Depot’s success. In fact, analysts have been bullish on the stock for a long time. It doesn’t seem as if Mr. Salzman is adding any sort of new insight to the conversation.

Second, the fact that the housing market is improving is a backward-looking indicator — the past performance of the housing market doesn’t necessarily predict its future performance. In fact, the housing market has been recovering for years, and Home Depot stock has been rising accordingly. Again, we have to ask ourselves: Why now?

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