Investing

Home Depot Rises To Top Buy After Market Shakes Off Earnings

When you think of big pandemic success stories, home improvement store Home Depot
HD
(HD) may not top your list. And why would it? It’s not a grocery store or a tech company; it doesn’t have an essential role to play — or does it?

To some, it does. While home maintenance projects are certainly essential activities (after all, no one likes living with an exploding toilet), Home Depot’s success comes due to people’s increase in boredom and free time, rather than necessity for their products. Various quarantine orders and job losses led to the American people having more time to start those long-awaited home improvement projects. And as a result, Home Depot has had a positively stellar 12 months.

But all good things must come to an end, and Home Depot appears to be wavering on its peak in the last six months or so. And since mid-February, the company’s stock has taken a (somewhat unprecedented) dive, from which it’s just beginning to recover.

Home Depot closed up 1.11% on Wednesday, ending the midweek at $266.24 per share at just under 3.8 million trades. This is hardly a change from the 22-day price average of $266.59, though it’s a welcome increase from the 10-day $257.32 price average. Overall, the stock is up 1.51% since the start of 2021.

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Home Depot (HD) Falls Even After Stellar Q4 Report

Home Depot is trending upward again because, since mid-February, it’s been trending…well, downward. Stocks fall in the market for plenty of reasons — as a result of overvaluation, corporate shakeups, loss of investor confidence, and changes in the political arena. But with Home Depot, the reason is simple: it released its Q4/2020 report.

Home Depot’s fourth-quarter report revealed that the company saw higher-than-expected profits of $32.3 billion, a 25% increase from YTD fiscal 2019. At the same time, their net earnings rose to $2.9 billion, compared to $2.5 billion a year ago.

Their revenue was also impressive, skyrocketing to $132 billion against $108 billion three years ago; and their operating income also increased, from $15.8 billion to almost $18.3 billion. Their EPS has seen a welcome increase over the last three years, as well, rising from $9.73 to $11.94 in per-share earnings.

On a similar note, Home Depot’s Q4 report also noted that the board of directors raised its quarterly dividend by 10% for the upcoming quarter. This brings the dividend payout to $1.54 per share, or an annual payment of $6.60 for the coming year.

Because of all this good news, the company’s future looks bright: it’s currently trading with a forward 12-month P/E of 20.97.

So… What was the problem?

Home Depot’s stock dropped on these impressive earnings because the report also indicated something that few investors like to hear. The company said in a statement that it “believes it is limited in its ability to forecast demand for 2021.” As a result, Home Depot withheld all guidance for 2021, which shook investor confidence — and thereby the markets. This resulted in the lowered share prices we’ve experienced over the last two weeks.

Q.ai’s Take on the Matter

Despite a weak fortnight in the market, Home Depot is poised to recover quickly, and even has the potential going forward to top its all-time 2020 gains. But solid share prices don’t always indicate a good buy for the long-term investor. So, we consulted our AI on the matter.

According to Q.ai, Home Depot rates A’s in Low Volatility Momentum and Quality Value, C in Growth, and D in Technicals. This puts them at above average overall, which indicates a bright future for a company that received an unexpected boon in 2020. As a result, Home Depot is a definitive Top Buy for the month of March.

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