Welcome to the new Pit Report!
Each week, we’ll feature a new stock and, throughout the week, my team and I will focus on the
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- The stock’s business and future
- What the charts are saying
- And what options market is telling us about the stock
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With the University of Georgia winning the College Football Playoff earlier this week, we figured the perfect thing to do would be to feature a company headquartered in the Peach State.
And the largest by market cap is … Home Depot (HD).
As of this writing, Home Depot is trading at $329. This is well off its 52-week high of $394.31, but also above the 52-week low of $264.51.
The stock is, pretty much like the S&P 500, in the middle of its range.
The Positives for Home Depot
It all starts with fewer people moving.
I currently have a mortgage of 2.75% for the next 28 years. If I sell my house and move, I can do so and make some money on my house … but my mortgage rate will balloon to about 7%.
My situation is the same for millions of people who bought houses over the last 5 years … There is little motivation to move for the time being.
So what does that mean? If I want a nicer house than the one I have, what am I going to do? I can put in a pool, build an addition or simply make the house much nicer inside.
If that’s the case, where are my contractors – or if I do it myself (which I am not), where am I – getting supplies?
The Home Depot. (Or maybe Lowe’s.)
Home Depot is usually a bit cheaper than Lowe’s and, in my experience, offers worse service. Contractors and DYI types don’t care about that – they care about price.
This plays right into Home Depot’s hands and should be a driver of continuing demand as homeowners upgrade kitchens and baths, build additions or plus-up their houses in other ways.
My wife currently wants to upgrade all of our lighting. Where did we go to look for lights? You guessed it … Home Depot
And the population shift of recent years toward the south and west – a path we took – means more grills, outdoor furniture and outdoor kitchens (the next thing on our list).
Downside for Home Depot
If the economy enters a real recession – not a small one – and many people, especially in higher paying jobs, get fired, that will crush demand.
We have seen demand start to falter in some clothing retailers. And a company that typically beats them on price, Amazon, is near a 52-week low.
These are factors that bode poorly for Home Depot.
Another potential major factor is if the housing market falls sharply. Cheaper homes would offset higher rates … and that could cause some people who have extra cash to choose to upgrade houses rather than improve their current residence.
This would be a serious problem for Home Depot.
All told, if you have an outlook longer than a year … I think you are probably fine buying here.
Near term, though, despite the stock having a golden cross, it has flatlined since the beginning of November.
The dividend is nice, but I think near term there could be some headwinds here at the macroeconomic level.
If I got long when it was near its 52 week low, I would take my money and move on, or at a minimum look to buy protective puts, because I see more downside risk than upside.
Later in the week Licia Leslie is going to break down the chart in a more near- term perspective and tell you what she sees in the trend lines and candles
Your Only Option,
Mark Sebastian