Why It’s Time to Sell Topsy-Turvy Home Depot
Home Depot (NYSE:HD) shares have had quite a run since the stock market bottomed in 2008-2009. In fact, the stock traded below $20 percent share in October 2008, while they currently trade at $80 percent share. However, now might be a good time to sell. For the past year, the stock has been range-bound. It has been a buy in the low- to mid-$70s and it has been a sell above $80. But if you look at the longer-term trend, what we have is a large run-up from 2008 through the first part of 2013, followed by what appears to be a topping pattern.
This pattern goes beyond the share price. One can find it in the fundamentals, as well. In short, Home Depot’s earnings growth has been slowing down considerably. This isn’t so apparent when you look at EPS growth because the company has been repurchasing a lot of stock. EPS growth last quarter was about 20 percent, and in previous years it has been about 25 percent. But earnings growth was just 12.5 percent year over year in the past quarter when in the previous year it was 18.7 percent. That’s rapid deceleration.
Sales growth is even less impressive at just 3.1 percent year over year in the most recent quarter. While the company should be applauded for raising its profit margin last quarter when many retailers struggled to do so, one has to question whether this is sustainable. Retail is a cutthroat business, and retailers are suffering as commodity prices are strong. Furthermore, this growth rate is down considerably from 5.3 percent in the most recent year.
So the stock is rolling over, the company’s growth is decelerating, and there are macro-economic headwinds. While the company reported “robust” May sales, the fact remains that the country saw a contraction in GDP in the first quarter of negative 1 percent. This has failed to put any pressure on equity markets, which are at all-time highs, but there is little doubt that there is economic weakness that can impact an economically sensitive company such as Home Depot.