Although mortgage rates are sitting at the highs for the
year and although the Fed is expected to raise rates later this year, if not
certainly early next year, the housing sector seems to be defying the odds. KB
Homes and Lennar both reported blowout quarters in the last couple weeks, with
Lennar saying orders rose 18% with values up 28%, which contributed to EPS
gains of 30%. Additionally, on June 23, the Commerce Department said new home
sales in May rose 2.2% to a 7-year high, and optimism continues to grow into
the summer months. But I believe there is a better pure housing recovery play
other than the homebuilders…Home Depot (HD).
Home Depot has, and continues to be one of the best-run
companies out there, and quarter after quarter, they continue to impress. The
reason that now is the best time to buy the stock is because, while most
retailers have their best quarters in Q4, Home Depot celebrates it’s Christmas
in Q2. Every time you pass a Home Depot during the spring and early summer
months, hundreds of people are seen filling their gardening areas, where sales
are plentiful and margins are high. With new home sales on the rise, new and
existing homeowners will be looking to spruce up their exteriors. But what will
really drive Home Depot’s future growth is the dedication it has to becoming an
online retail behemoth.
Over the last few years, the company has begun to combat
Amazon and improve its e-commerce business, which it is clearly exceeding at.
In fact, in comparison-shopping that I have recently done, Home Depot has
actually been cheaper than Amazon for a number of different items. But, the
true strength of the company’s online business lies in Home Depot’s omnichannel
efficiencies, offering in-store pick up and returns, which then drive customers
into their stores to add-on to their purchases. At a June 18 Goldman Sachs
conference, management provided an update on its e-commerce business, saying
that it continues to benefit greatly, with 40% of its brick-and-mortar stores
acting as fulfillment centers. Although they didn’t disclose figures at the
conference, Home Depot said that the average ticket size online was
significantly higher than in-store purchases which range between $55-$65 per
transaction. Most of the online purchases would tend to be larger, more costly
items like appliances and materials, which customers would rather have
delivered to their homes. In addition to offering multiple types of delivery,
including 2-day shipping, Home Depot is able to offer more than 1 million
different SKUs on line, compared to roughly 250,000 in stores, giving consumers
significantly more choices, which could allow Home Depot to open smaller stores
in the future, saving a lot of money which will trickle down to the bottom line.
As a result, Home Depot is expecting about $4B in e-commerce sales in 2015,
making up only 4.5% of overall revenues, which means there is tremendous upside
potential.
This $146B company supports a 2.10% dividend that continues
to grow, and while trading at a forward P/E of just 18x ’15 earnings, the stock
isn’t very expensive. Additionally, HD has a price-to-earnings growth (PEG)
rate of 1.68, which means that Home Depot really isn’t very expensive. On a
technical level, the stock is trading very well and is above key support. On
Friday, Home Depot closed at $112.60, almost 5% off its all-time high reached
in late March. If you look at this stock over the last year, there is an
uptrend support line that comes into play at $112, which is right around the
100-day moving average at $11.72 and slightly above the 78.6% Fibonacci retracement
at $111.23. The stock has traded around that $111-$112 level a number of times
in the last couple weeks, but continues to hold. However, having said all of
that, without many catalysts coming until its earnings report in early August,
you don’t need to rush out and buy the stock on Monday. With unemployment data
coming out this Friday and with Greece hopefully exiting the Eurozone
once-and-for all, there is still plenty of downside for the broader market,
which could give you a better entry point into the stock. If the later scenario
plays out, the entire market will be in for a 3% downside move and nothing will
be spared. So I would wait until the Greece situation is resolved and look for
Home Depot to fall to the 61.8% retracement of $105.92 and buy half of your
position there, and then the other half on the way back up using $112 as
support. My price target on Home Depot is $142, giving you a roughly 21% upside
from Friday’s close.
My current positions: Long
Gilead Sciences (GILD), Starbucks (SBUX), Facebook (FB), Wells Fargo (WFC),
ConocoPhillips (COP), Time Warner (TWX), Twitter (TWTR), NXP Semiconductors
(NXPI), Lockheed Martin (LMT), Darden Restaurants (DRI), Celgene (CELG),
Mobileye (MBLY), Jack In The Box (JACK), Under Armour (UA), United Rentals
(URI), Regeneron (REGN), Restoration Hardware (RH), Apple (AAPL), Southwest
Airlines (LUV), Dow Chemical (DOW), L Brands (LB), Dr. Pepper Snapple (DPS),
Costco (COST), AMGEN (AMGN), Home Depot (HD), Allergan (AGN), and FireEye
(FEYE).
Jeff Lewison
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