In this installment of Using The Value Line Report, we will be taking another look at household products retailer Home Depot, Inc. (HD - Free Home Depot Stock Report) and the factors that have contributed to the Dow stock’s somewhat meteoric ascent over the past few years. Moreover, we will examine its prospects over the next 3 to 5 years and whether the current P/E multiple (which can be found in the Top Label) leaves any room for worthwhile total returns over that horizon. Furthermore, a consideration of the technical merits and/or caveats of investing in these shares could offer support for a momentum play.
Attempting to time market trends is undoubtedly a method that is wrought with risk. Although there are credible arguments for both the pitfalls and merits of trend analysis, there are some companies that offer strong growth potential, even though they may not appear particularly sound financially or the operational outlook is questionable. Still, trend analysis is a technical approach that asserts the rationale of historical price movement as a strong indicator of future performance. This strategy of buying into a trend can be highly lucrative, but the key is to know how to predict a trend’s reversal and to sell or short that particular idea before the market moves against you. This method is a more momentum-based approach to investing.
On the other hand, investors looking to employ a more long-term approach would likely find fundamental analysis to be a more reliable methodology. This technique emphasizes intrinsic value based on various qualitative and quantitative factors, including macroeconomics, financial condition, and management style. This process is expected to give the investor an idea of the company’s current worth, the nature of its industry, and earnings predictability. This, allows one to weigh these factors against the equity’s market price and determine how to invest accordingly.
Although the two aforementioned, highly contrasted techniques are often polarized by their respective conceptual perspectives on investing, the Value Line report offers a wealth of qualitative, quantitative, and technical information that enables the investor to consider some of the more vital aspects of both styles. Indeed, Home Depot has various characteristics that could well appeal to both the trend-oriented momentum investor, as well as those seeking a more stable and predictable instrument for long-term capital gains.
The best means by which to analyze the pertinent data for determining a trend is by using the Graph, and the historical “Highs and Lows” that are listed directly above the Graph. In addition to these metrics, one can also establish a trend based on the Relative Price Strength, which compares the stock’s price performance versus the Value Line universe. This data is also found in the Graph. All of these metrics support the argument for momentum, as the stock has charted impressively over the past four years, remaining ahead of its 200-day moving averages for some time now. However, from a purely technical standpoint, one could argue that a correction is overdue. This is why the Value Line Timeliness system (found in the Ranks box) takes into account the 10-year trend of relative earnings and prices, as well as earnings surprises. That said, Home Depot’s rank (2; Above Average) suggests that the equity’s price performance is likely to outpace most of the other 1,700 stocks in the Value Line Investment Survey over the next six to 12 months.
From a fundamental perspective, there is a wealth of data that speaks to the financial health of the company, as well as its revenue and earnings growth potential over the next 3 to 5 years. A look at the Statistical Array offers insight into Home Depot’s past performance, based on actual data from the income statement and the balance sheet, as well as some key quantitative ratios, including Return on Total Capital and Return on Shareholder’s Equity. These metrics help us to see that, through a combination of profit growth, share buybacks (reduction in the number of shares outstanding), and effectively managing its debt, the company has been increasing its share earnings, Return on Total Capital, and Return on Shareholder’s equity for several years. Moreover, shifting over to the Annual Rates box, it becomes evident that Home Depot has a strong record of earnings, cash flow, and dividend growth rates over the past 5 years. Too, according to analyst Mathew Spencer’s projections over the pull to late decade, the company’s growth prospects over that span are promising, as well.
However, based on the 3- to 5-year Projections, which reside directly below the Ranks box, the Target Price Range indicates that the equity offers limited total return potential out to 2018-2020, from the current quotation.
Nonetheless, we believe that Home Depot is a sound investment choice, overall. In particular, conservative investors seeking exposure to the retail building supply industry, with some solid income to boot (dividend yield is 2.2%), should find HD shares an attractive option for year-ahead gains.